Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So, when we ran our eye over United States Lime & Minerals' (NASDAQ:USLM) trend of ROCE, we liked what we saw.
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. The formula for this calculation on United States Lime & Minerals is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = US$31m ÷ (US$272m - US$11m) (Based on the trailing twelve months to September 2020).
Therefore, United States Lime & Minerals has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 9.9% generated by the Basic Materials industry.
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating United States Lime & Minerals' past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For United States Lime & Minerals Tell Us?
While the current returns on capital are decent, they haven't changed much. The company has employed 40% more capital in the last five years, and the returns on that capital have remained stable at 12%. Since 12% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
Our Take On United States Lime & Minerals' ROCE
To sum it up, United States Lime & Minerals has simply been reinvesting capital steadily, at those decent rates of return. And the stock has done incredibly well with a 127% return over the last five years, so long term investors are no doubt ecstatic with that result. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.
On a final note, we've found 1 warning sign for United States Lime & Minerals that we think you should be aware of.
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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