Labrador Iron Ore Royalty (TSE:LIF) Is Investing Its Capital With Increasing Efficiency

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. And in light of that, the trends we're seeing at Labrador Iron Ore Royalty's (TSE:LIF) look very promising so lets take a look.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Labrador Iron Ore Royalty, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.20 = CA$159m ÷ (CA$837m - CA$53m) (Based on the trailing twelve months to June 2023).

So, Labrador Iron Ore Royalty has an ROCE of 20%. That's a fantastic return and not only that, it outpaces the average of 3.8% earned by companies in a similar industry.

Check out our latest analysis for Labrador Iron Ore Royalty

Above you can see how the current ROCE for Labrador Iron Ore Royalty compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

Labrador Iron Ore Royalty has not disappointed with their ROCE growth. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 59% over the last five years. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

The Key Takeaway

In summary, we're delighted to see that Labrador Iron Ore Royalty has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a staggering 127% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Labrador Iron Ore Royalty can keep these trends up, it could have a bright future ahead.

Like most companies, Labrador Iron Ore Royalty does come with some risks, and we've found 1 warning sign that you should be aware of.

Labrador Iron Ore Royalty is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.