If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. And in light of that, the trends we’re seeing at DRDGOLD’s (NYSE:DRD) look very promising so lets take a look.
Understanding Return On Capital Employed (ROCE)
If you haven’t worked with ROCE before, it measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on DRDGOLD is:
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).
Therefore, DRDGOLD has an ROCE of 29%. That’s a fantastic return and not only that, it outpaces the average of 9.5% earned by companies in a similar industry.
See 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’d like, you can check out the forecasts from the analysts covering DRDGOLD here for free.
So How Is DRDGOLD’s ROCE Trending?
We like the trends that we’re seeing from DRDGOLD. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 29%. The company is effectively making more money per dollar of capital used, and it’s worth noting that the amount of capital has increased too, by 160%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that’s why we’re impressed.
The Bottom Line On DRDGOLD’s ROCE
To sum it up, DRDGOLD has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a staggering 161% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.
DRDGOLD does have some risks though, and we’ve spotted 2 warning signs for DRDGOLD that you might be interested in.
If you’d like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
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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