Inca Minerals (ASX:ICG) Might Have The Makings Of A Multi-Bagger
Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Inca Minerals (ASX:ICG) so let's look a bit deeper.
Understanding Return On Capital Employed (ROCE)
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. To calculate this metric for Inca Minerals, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.068 = AU$1.7m ÷ (AU$25m - AU$299k) (Based on the trailing twelve months to December 2021).
So, Inca Minerals has an ROCE of 6.8%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 8.7%.
See our latest analysis for Inca Minerals
Historical performance is a great place to start when researching a stock so above you can see the gauge for Inca Minerals' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Inca Minerals, check out these free graphs here.
What Can We Tell From Inca Minerals' ROCE Trend?
We're delighted to see that Inca Minerals is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 6.8% on its capital. Not only that, but the company is utilizing 386% 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.
The Bottom Line
Overall, Inca Minerals gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Astute investors may have an opportunity here because the stock has declined 35% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.
If you want to know some of the risks facing Inca Minerals we've found 5 warning signs (1 is potentially serious!) that you should be aware of before investing here.
While Inca Minerals isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.