DRDGOLD (NYSE:DRD) Shareholders Will Want The ROCE Trajectory To Continue
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. 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 DRDGOLD (NYSE:DRD) so let's look a bit deeper.
What Is 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. To calculate this metric for DRDGOLD, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = R1.4b ÷ (R8.2b - R719m) (Based on the trailing twelve months to June 2023).
So, DRDGOLD has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 9.9% generated by the Metals and Mining 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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
So How Is DRDGOLD's ROCE Trending?
The trends we've noticed at DRDGOLD are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 18%. Basically the business is earning more per dollar of capital invested and in addition to that, 265% more capital is being employed now too. So we're very much inspired by what we're seeing at DRDGOLD thanks to its ability to profitably reinvest capital.
In Conclusion...
To sum it up, DRDGOLD has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
On a final note, we found 2 warning signs for DRDGOLD (1 doesn't sit too well with us) you should be aware of.
While DRDGOLD isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
