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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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, the ROCE of Globex Mining Enterprises (TSE:GMX) looks great, so lets see what the trend can tell us.
Understanding 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. Analysts use this formula to calculate it for Globex Mining Enterprises:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.36 = CA$4.6m ÷ (CA$13m - CA$173k) (Based on the trailing twelve months to September 2020).
Thus, Globex Mining Enterprises has an ROCE of 36%. That's a fantastic return and not only that, it outpaces the average of 0.5% earned by companies in a similar industry.
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Globex Mining Enterprises, check out these free graphs here.
What The Trend Of ROCE Can Tell Us
It's great to see that Globex Mining Enterprises has started to generate some pre-tax earnings from prior investments. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 36% on their capital employed. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 28%. Globex Mining Enterprises could be selling under-performing assets since the ROCE is improving.
The Key Takeaway
In summary, it's great to see that Globex Mining Enterprises has been able to turn things around and earn higher returns on lower amounts of capital. Since the stock has returned a staggering 223% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
Globex Mining Enterprises does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is concerning...
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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