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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. So when we looked at IMPACT Silver (CVE:IPT) and its trend of ROCE, we really liked what we saw.
What is 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. To calculate this metric for IMPACT Silver, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0022 = CA$146k ÷ (CA$67m - CA$2.1m) (Based on the trailing twelve months to March 2022).
So, IMPACT Silver has an ROCE of 0.2%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 2.4%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for IMPACT Silver's ROCE against it's prior returns. If you're interested in investigating IMPACT Silver's past further, check out this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
Shareholders will be relieved that IMPACT Silver has broken into profitability. The company now earns 0.2% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by IMPACT Silver has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.
What We Can Learn From IMPACT Silver's ROCE
To bring it all together, IMPACT Silver has done well to increase the returns it's generating from its capital employed. Astute investors may have an opportunity here because the stock has declined 29% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.
One more thing, we've spotted 3 warning signs facing IMPACT Silver that you might find interesting.
While IMPACT Silver may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.