Why The 50% Return On Capital At Platina Resources (ASX:PGM) Should Have Your Attention
What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Platina Resources' (ASX:PGM) returns on capital, so let's have a look.
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 Platina Resources, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.50 = AU$8.0m ÷ (AU$16m - AU$160k) (Based on the trailing twelve months to December 2021).
Therefore, Platina Resources has an ROCE of 50%. That's a fantastic return and not only that, it outpaces the average of 7.7% earned by companies in a similar industry.
See our latest analysis for Platina Resources
Historical performance is a great place to start when researching a stock so above you can see the gauge for Platina Resources' ROCE against it's prior returns. If you'd like to look at how Platina Resources has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
Like most people, we're pleased that Platina Resources is now generating some pretax earnings. While the business is profitable now, it used to be incurring losses on invested capital five years ago. In regards to capital employed, Platina Resources is using 36% 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. Platina Resources could be selling under-performing assets since the ROCE is improving.
What We Can Learn From Platina Resources' ROCE
In a nutshell, we're pleased to see that Platina Resources has been able to generate higher returns from less capital. Astute investors may have an opportunity here because the stock has declined 62% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.
One more thing to note, we've identified 3 warning signs with Platina Resources and understanding these should be part of your investment process.
Platina Resources 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.
