Shareholders Would Enjoy A Repeat Of Lundin Gold’s (TSE:LUG) Recent Growth In Returns

Shareholders Would Enjoy A Repeat Of Lundin Gold’s (TSE:LUG) Recent Growth In Returns
Shareholders Would Enjoy A Repeat Of Lundin Gold’s (TSE:LUG) Recent Growth In Returns

There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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 Lundin Gold’s (TSE:LUG) returns on capital, so let’s have a look.

Return On Capital Employed (ROCE): What Is It?

If you haven’t worked with ROCE before, it measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Lundin Gold is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)

0.30 = US$390m ÷ (US$1.5b – US$187m) (Based on the trailing twelve months to December 2023).

Therefore, Lundin Gold has an ROCE of 30%. In absolute terms that’s a great return and it’s even better than the Metals and Mining industry average of 1.3%.

See our latest analysis for Lundin Gold

TSX:LUG Return on Capital Employed April 21st 2024

In the above chart we have measured Lundin Gold’s 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 analyst report for Lundin Gold.

What Does the ROCE Trend For Lundin Gold Tell Us?

Lundin Gold has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it’s now earning 30% on its capital. In addition to that, Lundin Gold is employing 33% more capital than previously which is expected of a company that’s trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

What We Can Learn From Lundin Gold’s ROCE

In summary, it’s great to see that Lundin Gold has managed to break into profitability and is continuing to reinvest in its business. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it’s worth researching the company further to see if these trends are likely to persist.

One more thing, we’ve spotted 2 warning signs facing Lundin Gold that you might find interesting.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

Valuation is complex, but we’re helping to make it simple.

Find out whether Lundin Gold 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.

View the Free Analysis

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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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