Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Torex Gold Resources (TSE:TXG) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Torex Gold Resources is:

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

0.13 = US$214m ÷ (US$2.0b - US$318m) (Based on the trailing twelve months to June 2024).

Thus, Torex Gold Resources has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Metals and Mining industry average of 3.4% it's much better.

Check out our latest analysis for Torex Gold Resources

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

What Does the ROCE Trend For Torex Gold Resources Tell Us?

We like the trends that we're seeing from Torex Gold Resources. The data shows that returns on capital have increased substantially over the last five years to 13%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 67%. So we're very much inspired by what we're seeing at Torex Gold Resources thanks to its ability to profitably reinvest capital.

The Bottom Line

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Torex Gold Resources has. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 19% to shareholders. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

On a final note, we found 2 warning signs for Torex Gold Resources (1 is potentially serious) you should be aware of.