Investors Will Want Argo Blockchain's (LON:ARB) Growth In ROCE To Persist

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Argo Blockchain (LON:ARB) so let's look a bit deeper.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Argo Blockchain is:

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

0.17 = UK£33m ÷ (UK£257m - UK£65m) (Based on the trailing twelve months to September 2021).

Therefore, Argo Blockchain has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 8.3% generated by the Software industry.

Check out our latest analysis for Argo Blockchain

In the above chart we have measured Argo Blockchain'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 Argo Blockchain.

So How Is Argo Blockchain's ROCE Trending?

We're delighted to see that Argo Blockchain is reaping rewards from its investments and is now generating some pre-tax profits. About two years ago the company was generating losses but things have turned around because it's now earning 17% on its capital. In addition to that, Argo Blockchain is employing 792% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

In Conclusion...

To the delight of most shareholders, Argo Blockchain has now broken into profitability. And a remarkable 2,208% total return over the last three 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.

Argo Blockchain does have some risks, we noticed 3 warning signs (and 1 which is significant) we think you should know about.

While Argo Blockchain 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.