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Grange Resources (ASX:GRR): Are Investors Overlooking Returns On Capital?

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Simply Wall St
·3 min read
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If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at the ROCE trend of Grange Resources (ASX:GRR) we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Grange Resources:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.22 = AU$149m ÷ (AU$732m - AU$70m) (Based on the trailing twelve months to June 2020).

Thus, Grange Resources has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 9.5%.

Check out our latest analysis for Grange Resources

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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 Grange Resources, check out these free graphs here.

What Can We Tell From Grange Resources' ROCE Trend?

The fact that Grange Resources is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 22% which is a sight for sore eyes. In addition to that, Grange Resources is employing 35% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

The Bottom Line On Grange Resources' ROCE

Long story short, we're delighted to see that Grange Resources' reinvestment activities have paid off and the company is now profitable. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Grange Resources can keep these trends up, it could have a bright future ahead.

One more thing to note, we've identified 1 warning sign with Grange Resources and understanding this should be part of your investment process.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.