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’ll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it’s a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Wheaton Precious Metals (TSE:WPM) and its trend of ROCE, we really liked what we saw.
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 Wheaton Precious Metals, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.073 = US$513m ÷ (US$7.0b – US$26m) (Based on the trailing twelve months to December 2023).
Therefore, Wheaton Precious Metals has an ROCE of 7.3%. In absolute terms, that’s a low return, but it’s much better than the Metals and Mining industry average of 1.3%.
See 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 for free.
What Can We Tell From Wheaton Precious Metals’ ROCE Trend?
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 93% over the last five years. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company’s efficiencies. On that front, things are looking good so it’s worth exploring what management has said about growth plans going forward.
In Conclusion…
In summary, we’re delighted to see that Wheaton Precious Metals has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a staggering 159% to shareholders over the last five years, it looks like investors are recognizing these changes. 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.
While Wheaton Precious Metals looks impressive, no company is worth an infinite price. The intrinsic value infographic for WPM helps visualize whether it is currently trading for a fair price.
While Wheaton Precious Metals 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.
Valuation is complex, but we’re helping make it simple.
Find out whether Wheaton Precious Metals is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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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.