Yahoo Finance Wesdome Gold Mines (TSE:WDO) Will Want To Turn Around Its Return Trends
What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. However, after briefly looking over the numbers, we don't think Wesdome Gold Mines (TSE:WDO) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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 Wesdome Gold Mines:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.041 = CA$21m ÷ (CA$619m - CA$116m) (Based on the trailing twelve months to December 2022).
Therefore, Wesdome Gold Mines has an ROCE of 4.1%. On its own that's a low return on capital but it's in line with the industry's average returns of 3.6%.
View our latest analysis for Wesdome Gold Mines
In the above chart we have measured Wesdome Gold Mines' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Wesdome Gold Mines.
What The Trend Of ROCE Can Tell Us
When we looked at the ROCE trend at Wesdome Gold Mines, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 4.1% from 8.0% five years ago. However it looks like Wesdome Gold Mines might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
The Bottom Line
To conclude, we've found that Wesdome Gold Mines is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 257% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
Wesdome Gold Mines could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.
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.
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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.
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