If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in DRDGOLD's (NYSE:DRD) returns on capital, so let's have a look.
Understanding 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. To calculate this metric for DRDGOLD, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.29 = R1.7b ÷ (R6.3b - R593m) (Based on the trailing twelve months to December 2020).
So, DRDGOLD has an ROCE of 29%. That's a fantastic return and not only that, it outpaces the average of 11% earned by companies in a similar industry.
View our latest analysis for DRDGOLD
In the above chart we have measured DRDGOLD's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Can We Tell From DRDGOLD's ROCE Trend?
We like the trends that we're seeing from DRDGOLD. The data shows that returns on capital have increased substantially over the last five years to 29%. The amount of capital employed has increased too, by 160%. So we're very much inspired by what we're seeing at DRDGOLD thanks to its ability to profitably reinvest capital.
What We Can Learn From DRDGOLD's ROCE
In summary, it's great to see that DRDGOLD can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if DRDGOLD can keep these trends up, it could have a bright future ahead.
Like most companies, DRDGOLD does come with some risks, and we've found 1 warning sign that you should be aware of.
DRDGOLD is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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This article by Simply Wall St is general in nature. 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.
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About NYSE:DRD
DRDGOLD
A gold mining company, engages in the extraction of gold from the retreatment of surface mine tailings in South Africa.
Excellent balance sheet and good value.
