Yahoo Finance Wesdome Gold Mines (TSE:WDO) Will Be Hoping To Turn Its Returns On Capital Around
To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. In light of that, when we looked at Wesdome Gold Mines (TSE:WDO) and its ROCE trend, we weren't exactly thrilled.
What Is 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 Wesdome Gold Mines, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.01 = CA$5.4m ÷ (CA$619m - CA$89m) (Based on the trailing twelve months to December 2023).
Therefore, Wesdome Gold Mines has an ROCE of 1.0%. Even though it's in line with the industry average of 1.3%, it's still a low return by itself.
Check out our latest analysis for Wesdome Gold Mines
Above you can see how the current ROCE for Wesdome Gold Mines compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Wesdome Gold Mines .
What The Trend Of ROCE Can Tell Us
In terms of Wesdome Gold Mines' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 13%, but since then they've fallen to 1.0%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
The Bottom Line On Wesdome Gold Mines' ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Wesdome Gold Mines. And long term investors must be optimistic going forward because the stock has returned a huge 154% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.
One more thing to note, we've identified 1 warning sign with Wesdome Gold Mines and understanding it should be part of your investment process.
While Wesdome Gold Mines 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
