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To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we’ll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 TRX Gold’s (TSE:TRX) returns on capital, so let’s have a look.

Understanding 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. The formula for this calculation on TRX Gold is:

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

0.13 = US$8.7m ÷ (US$87m – US$19m) (Based on the trailing twelve months to November 2023).

Therefore, TRX Gold has an ROCE of 13%. On its own, that’s a standard return, however it’s much better than the 1.3% generated by the Metals and Mining industry.

View our latest analysis for TRX Gold

roce
TSX:TRX Return on Capital Employed April 3rd 2024

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

What The Trend Of ROCE Can Tell Us

We’re delighted to see that TRX Gold is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 13% on its capital. In addition to that, TRX Gold is employing 122% more capital than previously which is expected of a company that’s 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.

Our Take On TRX Gold’s ROCE

Long story short, we’re delighted to see that TRX Gold’s reinvestment activities have paid off and the company is now profitable. And since the stock has fallen 42% over the last five years, there might be an opportunity here. That being the case, research into the company’s current valuation metrics and future prospects seems fitting.

If you want to continue researching TRX Gold, you might be interested to know about the 1 warning sign that our analysis has discovered.

While TRX Gold may not currently earn the highest returns, we’ve compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

Valuation is complex, but we’re helping make it simple.

Find out whether TRX Gold is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis

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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