Returns On Capital Are Showing Encouraging Signs At Mountain Province Diamonds (TSE:MPVD)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Mountain Province Diamonds (TSE:MPVD) looks quite promising in regards to its trends of return on capital.

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. The formula for this calculation on Mountain Province Diamonds is:

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

0.096 = CA$83m ÷ (CA$924m - CA$62m) (Based on the trailing twelve months to September 2023).

Therefore, Mountain Province Diamonds has an ROCE of 9.6%. On its own that's a low return, but compared to the average of 1.8% generated by the Metals and Mining industry, it's much better.

View our latest analysis for Mountain Province Diamonds

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Mountain Province Diamonds' past further, check out this free graph covering Mountain Province Diamonds' past earnings, revenue and cash flow.

What Does the ROCE Trend For Mountain Province Diamonds Tell Us?

Mountain Province Diamonds' ROCE growth is quite impressive. 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 43% 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 Bottom Line

To sum it up, Mountain Province Diamonds is collecting higher returns from the same amount of capital, and that's impressive. And since the stock has dived 77% over the last five years, there may be other factors affecting the company's prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

If you want to know some of the risks facing Mountain Province Diamonds we've found 4 warning signs (1 can't be ignored!) that you should be aware of before investing here.

While Mountain Province Diamonds may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.