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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. However, after briefly looking over the numbers, we don't think Grange Resources (ASX:GRR) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Return On Capital Employed (ROCE): What Is It?
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. Analysts use this formula to calculate it for Grange Resources:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = AU$205m ÷ (AU$1.2b - AU$77m) (Based on the trailing twelve months to December 2023).
Therefore, Grange Resources has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Metals and Mining industry average of 11% it's much better.
Check out our latest analysis for Grange Resources
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'd like to look at how Grange Resources has performed in the past in other metrics, you can view this free graph of Grange Resources' past earnings, revenue and cash flow.
What Does the ROCE Trend For Grange Resources Tell Us?
When we looked at the ROCE trend at Grange Resources, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 18% from 23% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
In Conclusion...
Bringing it all together, while we're somewhat encouraged by Grange Resources' reinvestment in its own business, we're aware that returns are shrinking. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 115% gain to shareholders who have held over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.