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Capital Allocation Trends At Endeavour Silver (TSE:EDR) Aren't Ideal

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If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. However, after investigating Endeavour Silver (TSE:EDR), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Endeavour Silver:

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

0.071 = US$22m ÷ (US$355m - US$41m) (Based on the trailing twelve months to March 2022).

Thus, Endeavour Silver has an ROCE of 7.1%. On its own that's a low return, but compared to the average of 1.9% generated by the Metals and Mining industry, it's much better.

Check out our latest analysis for Endeavour Silver

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Above you can see how the current ROCE for Endeavour Silver compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Endeavour Silver.

What Can We Tell From Endeavour Silver's ROCE Trend?

In terms of Endeavour Silver's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 7.1% from 12% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From Endeavour Silver's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Endeavour Silver. In light of this, the stock has only gained 6.0% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

On a final note, we've found 5 warning signs for Endeavour Silver that we think you should be aware of.

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.

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

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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