If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. With that in mind, we've noticed some promising trends at 5N Plus (TSE:VNP) so let's look a bit deeper.
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 5N Plus is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.071 = US$14m ÷ (US$228m - US$31m) (Based on the trailing twelve months to September 2020).
Thus, 5N Plus has an ROCE of 7.1%. On its own that's a low return on capital but it's in line with the industry's average returns of 7.1%.
Check out our latest analysis for 5N Plus
In the above chart we have measured 5N Plus' 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 5N Plus here for free.
The Trend Of ROCE
5N Plus has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 7.1% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by 5N Plus has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.
In Conclusion...
To sum it up, 5N Plus is collecting higher returns from the same amount of capital, and that's impressive. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.
5N Plus does have some risks though, and we've spotted 2 warning signs for 5N Plus that you might be interested in.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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This article by Simply Wall St is general in nature. 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.
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About TSX:VNP
5N Plus
Produces and sells specialty metals and chemicals in North America, Europe, and Asia.
Solid track record with reasonable growth potential.
