Returns At IMPACT Silver (CVE:IPT) Are On The Way Up

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, IMPACT Silver (CVE:IPT) looks quite promising in regards to its trends of return on capital.

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. To calculate this metric for IMPACT Silver, this is the formula:

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

0.023 = CA$1.5m ÷ (CA$66m - CA$1.8m) (Based on the trailing twelve months to September 2021).

Thus, IMPACT Silver has an ROCE of 2.3%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 3.7%.

Check out our latest analysis for IMPACT Silver

Historical performance is a great place to start when researching a stock so above you can see the gauge for IMPACT Silver's ROCE against it's prior returns. If you'd like to look at how IMPACT Silver has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From IMPACT Silver's ROCE Trend?

We're delighted to see that IMPACT Silver is reaping rewards from its investments and has now broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 2.3% on its capital. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

The Bottom Line

In summary, we're delighted to see that IMPACT Silver has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Astute investors may have an opportunity here because the stock has declined 19% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

On a separate note, we've found 3 warning signs for IMPACT Silver you'll probably want to know about.

While IMPACT Silver isn't earning the highest return, check out this free list of companies that are 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.