There Are Reasons To Feel Uneasy About Superior Gold's (CVE:SGI) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Superior Gold (CVE:SGI) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What is it?

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. The formula for this calculation on Superior Gold is:

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

0.033 = US$2.7m ÷ (US$105m - US$24m) (Based on the trailing twelve months to June 2021).

So, Superior Gold has an ROCE of 3.3%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 4.2%.

See our latest analysis for Superior Gold

In the above chart we have measured Superior Gold's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Superior Gold.

What The Trend Of ROCE Can Tell Us

In terms of Superior Gold's historical ROCE movements, the trend isn't fantastic. Around four years ago the returns on capital were 9.9%, but since then they've fallen to 3.3%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line On Superior Gold's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Superior Gold is reinvesting for growth and has higher sales as a result. These trends don't appear to have influenced returns though, because the total return from the stock has been mostly flat over the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you'd like to know more about Superior Gold, we've spotted 3 warning signs, and 1 of them shouldn't be ignored.

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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.