We Like Torex Gold Resources' (TSE:TXG) Returns And Here's How They're Trending

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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 Torex Gold Resources (TSE:TXG) we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

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 Torex Gold Resources is:

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

0.23 = US$289m ÷ (US$1.4b - US$161m) (Based on the trailing twelve months to June 2022).

So, Torex Gold Resources has an ROCE of 23%. 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 Torex Gold Resources

Above you can see how the current ROCE for Torex Gold Resources 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 Torex Gold Resources here for free.

What Can We Tell From Torex Gold Resources' ROCE Trend?

Torex Gold Resources is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 159% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

What We Can Learn From Torex Gold Resources' ROCE

In summary, we're delighted to see that Torex Gold Resources has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And since the stock has fallen 49% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

On a final note, we found 2 warning signs for Torex Gold Resources (1 is a bit unpleasant) you should be aware of.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.