If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. 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 Nexa Resources (NYSE:NEXA) and its trend of ROCE, we really liked what we saw.
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. To calculate this metric for Nexa Resources, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = US$536m ÷ (US$5.1b - US$1.0b) (Based on the trailing twelve months to June 2022).
Thus, Nexa Resources has an ROCE of 13%. In isolation, that's a pretty standard return but against the Metals and Mining industry average of 21%, it's not as good.
In the above chart we have measured Nexa 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 Nexa Resources.
What Does the ROCE Trend For Nexa Resources Tell Us?
You'd find it hard not to be impressed with the ROCE trend at Nexa Resources. The figures show that over the last five years, returns on capital have grown by 220%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Interestingly, the business may be becoming more efficient because it's applying 21% less capital than it was five years ago. Nexa Resources may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
From what we've seen above, Nexa Resources has managed to increase it's returns on capital all the while reducing it's capital base. And since the stock has fallen 22% over the last three years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.
Nexa Resources does have some risks though, and we've spotted 2 warning signs for Nexa Resources that you might be interested in.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.
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