Labrador Iron Ore Royalty (TSE:LIF) Knows How To Allocate Capital Effectively
To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. So when we looked at the ROCE trend of Labrador Iron Ore Royalty (TSE:LIF) we really liked what we saw.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Labrador Iron Ore Royalty:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.20 = CA$159m ÷ (CA$837m - CA$53m) (Based on the trailing twelve months to June 2023).
Therefore, Labrador Iron Ore Royalty 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 2.5%.
View our latest analysis for Labrador Iron Ore Royalty
Above you can see how the current ROCE for Labrador Iron Ore Royalty compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Labrador Iron Ore Royalty.
The Trend Of ROCE
Labrador Iron Ore Royalty is showing promise given that its ROCE is trending up and to the right. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 59% in that same time. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.
The Key Takeaway
In summary, we're delighted to see that Labrador Iron Ore Royalty has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And a remarkable 106% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.
Like most companies, Labrador Iron Ore Royalty does come with some risks, and we've found 1 warning sign that you should be aware of.
Labrador Iron Ore Royalty 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.
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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.
