Yahoo Finance Here's What Geodrill's (TSE:GEO) Strong Returns On Capital Mean
What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. Ergo, when we looked at the ROCE trends at Geodrill (TSE:GEO), we liked what we saw.
Return On Capital Employed (ROCE): What is it?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Geodrill:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.20 = US$18m ÷ (US$120m - US$29m) (Based on the trailing twelve months to September 2021).
So, Geodrill has an ROCE of 20%. That's a fantastic return and not only that, it outpaces the average of 4.2% earned by companies in a similar industry.
View our latest analysis for Geodrill
Above you can see how the current ROCE for Geodrill 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 Geodrill.
What Does the ROCE Trend For Geodrill Tell Us?
We'd be pretty happy with returns on capital like Geodrill. Over the past five years, ROCE has remained relatively flat at around 20% and the business has deployed 60% more capital into its operations. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. You'll see this when looking at well operated businesses or favorable business models.
The Key Takeaway
In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. However, over the last five years, the stock hasn't provided much growth to shareholders in the way of total returns. For that reason, savvy investors might want to look further into this company in case it's a prime investment.
If you want to know some of the risks facing Geodrill we've found 2 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.
Geodrill 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.
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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