What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Royal Gold (NASDAQ:RGLD) so let's look a bit deeper.
What is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Royal Gold, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.097 = US$262m ÷ (US$2.8b - US$63m) (Based on the trailing twelve months to March 2021).
Thus, Royal Gold has an ROCE of 9.7%. In absolute terms, that's a low return but it's around the Metals and Mining industry average of 12%.
Above you can see how the current ROCE for Royal 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 Royal Gold here for free.
How Are Returns Trending?
Royal Gold is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 196% whilst employing roughly the same amount of capital. 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 summary, we're delighted to see that Royal Gold has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 46% return over the last five years. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
Royal Gold does have some risks though, and we've spotted 1 warning sign for Royal Gold that you might be interested in.
While Royal Gold may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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