Investors Will Want Sigma Lithium's (NASDAQ:SGML) Growth In ROCE To Persist

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. Speaking of which, we noticed some great changes in Sigma Lithium's (NASDAQ:SGML) returns on capital, so let's have a look.

What Is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Sigma Lithium is:

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

0.19 = CA$65m ÷ (CA$567m - CA$223m) (Based on the trailing twelve months to June 2024).

So, Sigma Lithium has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 11% generated by the Metals and Mining industry.

Check out our latest analysis for Sigma Lithium

Above you can see how the current ROCE for Sigma Lithium 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 Sigma Lithium for free.

What Can We Tell From Sigma Lithium's ROCE Trend?

Sigma Lithium has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 19% which is a sight for sore eyes. In addition to that, Sigma Lithium is employing 2,184% 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.

The Bottom Line On Sigma Lithium's ROCE

Long story short, we're delighted to see that Sigma Lithium's reinvestment activities have paid off and the company is now profitable. And a remarkable 836% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Sigma Lithium can keep these trends up, it could have a bright future ahead.

If you'd like to know about the risks facing Sigma Lithium, we've discovered 2 warning signs that you should be aware of.

While Sigma Lithium 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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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.