Stock Analysis

We Like Lundin Gold's (TSE:LUG) Returns And Here's How They're Trending

  •  Updated
TSX:LUG
Source: Shutterstock

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. So when we looked at the ROCE trend of Lundin Gold (TSE:LUG) we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Lundin Gold:

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

0.25 = US$336m ÷ (US$1.7b - US$315m) (Based on the trailing twelve months to June 2022).

Therefore, Lundin Gold has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 3.3%.

View our latest analysis for Lundin Gold

roce
TSX:LUG Return on Capital Employed August 30th 2022

In the above chart we have measured Lundin Gold's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Lundin Gold here for free.

What The Trend Of ROCE Can Tell Us

Lundin Gold has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 25% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Lundin Gold is utilizing 220% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 19% of the business, which is more than it was five years ago. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

The Key Takeaway

Overall, Lundin Gold gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Since the stock has returned a solid 73% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Lundin Gold can keep these trends up, it could have a bright future ahead.

On a final note, we found 2 warning signs for Lundin Gold (1 shouldn't be ignored) you should be aware of.

Lundin Gold 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.

Valuation is complex, but we're helping make it simple.

Find out whether Lundin Gold is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis

About TSX:LUG

Lundin Gold

Lundin Gold Inc. operates as a mining company in Canada.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation1
Future Growth0
Past Performance2
Financial Health6
Dividends3

Read more about these checks in the individual report sections or in our analysis model.

Flawless balance sheet second-rate dividend payer.