If you’re not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we’d want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. And in light of that, the trends we’re seeing at Ero Copper’s (TSE:ERO) look very promising so lets take a look.
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 Ero Copper:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.46 = US$251m ÷ (US$628m – US$83m) (Based on the trailing twelve months to June 2021).
So, Ero Copper has an ROCE of 46%. That’s a fantastic return and not only that, it outpaces the average of 2.5% earned by companies in a similar industry.
Above you can see how the current ROCE for Ero Copper 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 Ero Copper here for free.
What The Trend Of ROCE Can Tell Us
We’re delighted to see that Ero Copper is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses four years ago, but now it’s earning 46% which is a sight for sore eyes. Not only that, but the company is utilizing 136% more capital than before, but that’s to be expected from a company 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.
On a related note, the company’s ratio of current liabilities to total assets has decreased to 13%, which basically reduces it’s funding from the likes of short-term creditors or suppliers. This tells us that Ero Copper has grown its returns without a reliance on increasing their current liabilities, which we’re very happy with.
What We Can Learn From Ero Copper’s ROCE
Long story short, we’re delighted to see that Ero Copper’s reinvestment activities have paid off and the company is now profitable. And with the stock having performed exceptionally well over the last three 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 Ero Copper can keep these trends up, it could have a bright future ahead.
Ero Copper does have some risks, we noticed 4 warning signs (and 1 which is a bit unpleasant) we think you should know about.
If you’d like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
If you’re looking to trade a wide range of investments, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted
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.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.