What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we’ll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in YX Precious Metals Bhd’s (KLSE:YXPM) returns on capital, so let’s have a look.
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 YX Precious Metals Bhd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.12 = RM13m ÷ (RM113m – RM4.2m) (Based on the trailing twelve months to March 2024).
Therefore, YX Precious Metals Bhd has an ROCE of 12%. That’s a pretty standard return and it’s in line with the industry average of 12%.
Check out our latest analysis for YX Precious Metals Bhd
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you’re interested in investigating YX Precious Metals Bhd’s past further, check out this free graph covering YX Precious Metals Bhd’s past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
YX Precious Metals Bhd is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 12%. The company is effectively making more money per dollar of capital used, and it’s worth noting that the amount of capital has increased too, by 176%. This can indicate that there’s plenty of opportunities to invest capital internally and at ever higher rates, a combination that’s common among multi-baggers.
On a related note, the company’s ratio of current liabilities to total assets has decreased to 3.7%, which basically reduces it’s funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business’ underlying economics, which is great to see.
What We Can Learn From YX Precious Metals Bhd’s ROCE
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that’s what YX Precious Metals Bhd has. Since the total return from the stock has been almost flat over the last year, there might be an opportunity here if the valuation looks good. With that in mind, we believe the promising trends warrant this stock for further investigation.
One more thing to note, we’ve identified 2 warning signs with YX Precious Metals Bhd and understanding these should be part of your investment process.
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.