Returns On Capital Are Showing Encouraging Signs At Royal Gold (NASDAQ:RGLD)
If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Royal Gold's (NASDAQ:RGLD) returns on capital, so let's have a look.
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. The formula for this calculation on Royal Gold is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.082 = US$284m ÷ (US$3.5b - US$64m) (Based on the trailing twelve months to December 2022).
Therefore, Royal Gold has an ROCE of 8.2%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 15%.
Check out our latest analysis for Royal Gold
Above you can see how the current ROCE for Royal Gold compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Royal Gold here for free.
How Are Returns Trending?
Royal Gold's ROCE growth is quite impressive. 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. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.
The Bottom Line
In summary, we're delighted to see that Royal Gold has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a solid 54% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Royal Gold can keep these trends up, it could have a bright future ahead.
If you'd like to know about the risks facing Royal Gold, we've discovered 1 warning sign that you should be aware of.
While Royal Gold 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.
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