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Sandstorm Gold (TSE:SSL) Might Have The Makings Of A Multi-Bagger

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·3 min read
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What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Sandstorm Gold (TSE:SSL) looks quite promising in regards to its trends of return on capital.

What is 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. To calculate this metric for Sandstorm Gold, this is the formula:

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

0.065 = US$42m ÷ (US$649m - US$5.9m) (Based on the trailing twelve months to June 2021).

Thus, Sandstorm Gold has an ROCE of 6.5%. On its own that's a low return, but compared to the average of 2.7% generated by the Metals and Mining industry, it's much better.

See our latest analysis for Sandstorm Gold

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Above you can see how the current ROCE for Sandstorm 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 Sandstorm Gold here for free.

The Trend Of ROCE

Sandstorm Gold has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 6.5% which is a sight for sore eyes. Not only that, but the company is utilizing 24% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

What We Can Learn From Sandstorm Gold's ROCE

Long story short, we're delighted to see that Sandstorm Gold's reinvestment activities have paid off and the company is now profitable. Since the stock has only returned 2.4% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

If you want to continue researching Sandstorm Gold, you might be interested to know about the 2 warning signs that our analysis has discovered.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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.

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