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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Kinross Gold's (TSE:K) returns on capital, so let's have a look.
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. To calculate this metric for Kinross Gold, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = US$1.8b ÷ (US$10b - US$661m) (Based on the trailing twelve months to June 2021).
So, Kinross Gold has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 4.1% generated by the Metals and Mining industry.
Above you can see how the current ROCE for Kinross Gold compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Does the ROCE Trend For Kinross Gold Tell Us?
We're delighted to see that Kinross Gold is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 18% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Kinross Gold is utilizing 30% more capital than it was five years ago. 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.
Our Take On Kinross Gold's ROCE
Overall, Kinross Gold gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And with a respectable 58% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
Kinross Gold does have some risks though, and we've spotted 2 warning signs for Kinross Gold that you might be interested in.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.
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