Capital Investment Trends At Sandfire Resources (ASX:SFR) Look Strong
There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. That's why when we briefly looked at Sandfire Resources' (ASX:SFR) ROCE trend, we were very happy with what we saw.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Sandfire Resources:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.20 = AU$180m ÷ (AU$973m - AU$91m) (Based on the trailing twelve months to December 2020).
So, Sandfire Resources has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 9.5%.
See our latest analysis for Sandfire Resources
In the above chart we have measured Sandfire Resources' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Sandfire Resources.
What Can We Tell From Sandfire Resources' ROCE Trend?
We'd be pretty happy with returns on capital like Sandfire Resources. Over the past five years, ROCE has remained relatively flat at around 20% and the business has deployed 79% more capital into its operations. Now considering ROCE is an attractive 20%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. You'll see this when looking at well operated businesses or favorable business models.
The Bottom Line
In short, we'd argue Sandfire Resources has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. In light of this, the stock has only gained 35% over the last five years for shareholders who have owned the stock in this period. So because of the trends we're seeing, we'd recommend looking further into this stock to see if it has the makings of a multi-bagger.
Sandfire Resources does have some risks, we noticed 2 warning signs (and 1 which can't be ignored) we think you should know about.
Sandfire Resources 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.
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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