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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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Rumble Resources (ASX:RTR) so let's look a bit deeper.
What is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Rumble Resources:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.00065 = AU$11k ÷ (AU$19m - AU$999k) (Based on the trailing twelve months to December 2020).
Therefore, Rumble Resources has an ROCE of 0.06%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 8.9%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Rumble Resources' ROCE against it's prior returns. If you're interested in investigating Rumble Resources' past further, check out this free graph of past earnings, revenue and cash flow.
So How Is Rumble Resources' ROCE Trending?
Rumble Resources has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 0.06% on its capital. And unsurprisingly, like most companies trying to break into the black, Rumble Resources is utilizing 237% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
The Key Takeaway
To the delight of most shareholders, Rumble Resources has now broken into profitability. Since the stock has returned a staggering 3,650% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Rumble Resources can keep these trends up, it could have a bright future ahead.
Rumble Resources does have some risks, we noticed 4 warning signs (and 2 which are significant) we think you should know about.
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.
This article by Simply Wall St is general in nature. 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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