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. So on that note, Petropavlovsk (LON:POG) looks quite promising in regards to its trends of return on capital.
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. Analysts use this formula to calculate it for Petropavlovsk:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = US$254m ÷ (US$1.8b - US$237m) (Based on the trailing twelve months to June 2020).
Therefore, Petropavlovsk has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Metals and Mining industry average of 13% it's much better.
Check out our latest analysis for Petropavlovsk
Above you can see how the current ROCE for Petropavlovsk compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Can We Tell From Petropavlovsk's ROCE Trend?
Petropavlovsk has not disappointed with their ROCE growth. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 222% over the last five years. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 13%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Petropavlovsk has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.
What We Can Learn From Petropavlovsk's ROCE
To sum it up, Petropavlovsk is collecting higher returns from the same amount of capital, and that's impressive. And a remarkable 276% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.
On a separate note, we've found 1 warning sign for Petropavlovsk you'll probably want to know about.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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 LSE:POG
Petropavlovsk
Petropavlovsk PLC operates as a gold mining company in the Far East of Russia.
Undervalued with moderate growth potential.
