SilverCrest Metals (TSE:SIL) Is Very Good At Capital Allocation

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at the ROCE trend of SilverCrest Metals (TSE:SIL) we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on SilverCrest Metals is:

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

0.32 = US$131m ÷ (US$460m - US$52m) (Based on the trailing twelve months to December 2023).

Thus, SilverCrest Metals has an ROCE of 32%. That's a fantastic return and not only that, it outpaces the average of 1.4% earned by companies in a similar industry.

View our latest analysis for SilverCrest Metals

Above you can see how the current ROCE for SilverCrest Metals compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering SilverCrest Metals for free.

What Can We Tell From SilverCrest Metals' ROCE Trend?

The fact that SilverCrest Metals is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 32% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, SilverCrest Metals is utilizing 941% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

In Conclusion...

Overall, SilverCrest Metals gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One final note, you should learn about the 3 warning signs we've spotted with SilverCrest Metals (including 1 which is a bit unpleasant) .

SilverCrest Metals 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.