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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we’ve noticed some promising trends at Gold (JSE:GFI) so let’s look a bit deeper.
What is Return On Capital Employed (ROCE)?
Just to clarify if you’re unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Gold
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.19 = US$961m ÷ (US$6.8b – US$1.7b) (Based on the trailing twelve months to June 2020).
Thus, Gold That’s a pretty standard return and it’s in line with the industry average of 19%.
Check out our latest analysis for Gold
JSE:GFI Return on Capital Employed January 23rd 2021
What The Trend Of ROCE Can Tell Us
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 25% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. It’s worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase. The Bottom Line
In summary, we’re delighted to see that Gold
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If you decide to trade Gold
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