We Like These Underlying Return On Capital Trends At Sotkamo Silver (NGM:SOSI)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Sotkamo Silver (NGM:SOSI) so let's look a bit deeper.

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. The formula for this calculation on Sotkamo Silver is:

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

0.13 = kr75m ÷ (kr676m - kr96m) (Based on the trailing twelve months to March 2024).

So, Sotkamo Silver has an ROCE of 13%. That's a relatively normal return on capital, and it's around the 12% generated by the Metals and Mining industry.

See our latest analysis for Sotkamo Silver

Above you can see how the current ROCE for Sotkamo Silver compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Sotkamo Silver .

What The Trend Of ROCE Can Tell Us

We're delighted to see that Sotkamo Silver is reaping rewards from its investments and has now broken into profitability. The company now earns 13% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Sotkamo Silver has remained flat over the period. 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. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

In Conclusion...

In summary, we're delighted to see that Sotkamo Silver has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Given the stock has declined 47% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you want to know some of the risks facing Sotkamo Silver we've found 3 warning signs (2 are potentially serious!) that you should be aware of before investing here.

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.

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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.

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