If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we’ll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. So on that note, Wheaton Precious Metals (TSE:WPM) looks quite promising in regards to its trends of return on capital.
What Is Return On Capital Employed (ROCE)?
For those that aren’t sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Wheaton Precious Metals, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.066 = US$454m ÷ (US$6.9b – US$22m) (Based on the trailing twelve months to September 2023).
So, Wheaton Precious Metals has an ROCE of 6.6%. On its own that’s a low return, but compared to the average of 2.9% generated by the Metals and Mining industry, it’s much better.
View our latest analysis for Wheaton Precious Metals
Above you can see how the current ROCE for Wheaton Precious Metals compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’d like, you can check out the forecasts from the analysts covering Wheaton Precious Metals here for free.
How Are Returns Trending?
Wheaton Precious Metals is showing promise given that its ROCE is trending up and to the right. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 616% over the last five years. So it’s likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn’t changed considerably. It’s worth looking deeper into this though because while it’s great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
The Bottom Line On Wheaton Precious Metals’ ROCE
As discussed above, Wheaton Precious Metals appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And a remarkable 169% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it’s worth looking further into this stock because if Wheaton Precious Metals can keep these trends up, it could have a bright future ahead.
Before jumping to any conclusions though, we need to know what value we’re getting for the current share price. That’s where you can check out our FREE intrinsic value estimation that compares the share price and estimated value.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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.