The Return Trends At Eastern Platinum (TSE:ELR) Look Promising
To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Eastern Platinum (TSE:ELR) looks quite promising in regards to its trends of return on capital.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Eastern Platinum, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.073 = US$6.4m ÷ (US$159m - US$72m) (Based on the trailing twelve months to June 2023).
Therefore, Eastern Platinum has an ROCE of 7.3%. In absolute terms, that's a low return, but it's much better than the Metals and Mining industry average of 2.5%.
View our latest analysis for Eastern Platinum
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're interested in investigating Eastern Platinum's past further, check out this free graph of past earnings, revenue and cash flow.
What Can We Tell From Eastern Platinum's ROCE Trend?
It's great to see that Eastern Platinum has started to generate some pre-tax earnings from prior investments. The company was generating losses five years ago, but now it's turned around, earning 7.3% which is no doubt a relief for some early shareholders. In regards to capital employed, Eastern Platinum is using 46% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 45% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.
The Bottom Line On Eastern Platinum's ROCE
In summary, it's great to see that Eastern Platinum has been able to turn things around and earn higher returns on lower amounts of capital. Given the stock has declined 63% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.
Eastern Platinum does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those can't be ignored...
While Eastern Platinum may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.
