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To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Speaking of which, we noticed some great changes in Victoria Gold's (TSE:VGCX) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What is it?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Victoria Gold, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.23 = CA$161m ÷ (CA$827m - CA$115m) (Based on the trailing twelve months to September 2021).
So, Victoria Gold has an ROCE of 23%. That's a fantastic return and not only that, it outpaces the average of 5.2% earned by companies in a similar industry.
Above you can see how the current ROCE for Victoria Gold 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 Victoria Gold.
The Trend Of ROCE
Victoria Gold has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 23% which is a sight for sore eyes. In addition to that, Victoria Gold is employing 292% more capital than previously which is expected of a company that's trying to break into profitability. 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.
What We Can Learn From Victoria Gold's ROCE
Overall, Victoria 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 the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Victoria Gold can keep these trends up, it could have a bright future ahead.
One more thing, we've spotted 2 warning signs facing Victoria Gold that you might find interesting.
Victoria Gold is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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.