Returns On Capital Are Showing Encouraging Signs At Serabi Gold (LON:SRB)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Serabi Gold's (LON:SRB) returns on capital, so let's have a look.

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. To calculate this metric for Serabi Gold, this is the formula:

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

0.034 = US$3.1m ÷ (US$108m - US$15m) (Based on the trailing twelve months to September 2023).

So, Serabi Gold has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 7.7%.

View our latest analysis for Serabi Gold

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

What Does the ROCE Trend For Serabi Gold Tell Us?

We're delighted to see that Serabi Gold is reaping rewards from its investments and has now broken into profitability. The company now earns 3.4% on its capital, because five years ago it was incurring losses. 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. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. Because in the end, a business can only get so efficient.

The Key Takeaway

In summary, we're delighted to see that Serabi Gold has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 40% to shareholders. So with that in mind, we think the stock deserves further research.

One final note, you should learn about the 3 warning signs we've spotted with Serabi Gold (including 2 which are concerning) .

While Serabi Gold 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.