If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, the ROCE of Wesdome Gold Mines (TSE:WDO) looks great, so lets see what the trend can tell us.
What is 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. To calculate this metric for Wesdome Gold Mines, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.26 = CA$85m ÷ (CA$352m - CA$32m) (Based on the trailing twelve months to September 2020).
Thus, Wesdome Gold Mines has an ROCE of 26%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 1.0%.
Above you can see how the current ROCE for Wesdome Gold Mines compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Wesdome Gold Mines.
What Can We Tell From Wesdome Gold Mines' ROCE Trend?
Investors would be pleased with what's happening at Wesdome Gold Mines. The data shows that returns on capital have increased substantially over the last five years to 26%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 196%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
To sum it up, Wesdome Gold Mines has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a staggering 377% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.
On a final note, we've found 1 warning sign for Wesdome Gold Mines that we think you should be aware of.
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