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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at ViaGold Rare Earth Resources Holdings (ASX:VIA) and its trend of ROCE, we really liked what we saw.

Understanding 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. Analysts use this formula to calculate it for ViaGold Rare Earth Resources Holdings:

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

0.051 = AU$1.1m ÷ (AU$61m - AU$38m) (Based on the trailing twelve months to March 2021).

Thus, ViaGold Rare Earth Resources Holdings has an ROCE of 5.1%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 9.2%.

See our latest analysis for ViaGold Rare Earth Resources Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for ViaGold Rare Earth Resources Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of ViaGold Rare Earth Resources Holdings, check out these free graphs here.

The Trend Of ROCE

The fact that ViaGold Rare Earth Resources Holdings is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 5.1% on its capital. And unsurprisingly, like most companies trying to break into the black, ViaGold Rare Earth Resources Holdings is utilizing 897% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 63% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

Our Take On ViaGold Rare Earth Resources Holdings' ROCE

In summary, it's great to see that ViaGold Rare Earth Resources Holdings has managed to break into profitability and is continuing to reinvest in its business. Since the stock has returned a staggering 179% to shareholders over the last year, it looks like investors are recognizing these changes. 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.

On a separate note, we've found 3 warning signs for ViaGold Rare Earth Resources Holdings you'll probably want to know about.

While ViaGold Rare Earth Resources Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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