We love these underlying trends in return on capital at Wesdome Gold Mines (TSE: WDO)

There are a few key trends to look for if we are to identify the next multi-bagger. Generally, we will want to notice a growing trend to recover on capital employed (ROCE) and at the same time, a based capital employed. This shows us that it is a composing machine, capable of continually reinvesting its profits in the business and generating higher returns. So on that note, Wesdome Gold Mines (TSE: WDO) looks pretty promising when it comes to its ROI trends.

What is Return on Employee Capital (ROCE)?

For those who don’t know, ROCE is a measure of a company’s annual pre-tax profit (its return), relative to the capital employed in the company. To calculate this metric for Wesdome Gold Mines, here is the formula:

Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)

0.16 = C $ 76 million ÷ (C $ 495 million – C $ 33 million) (Based on the last twelve months up to June 2021).

Therefore, Wesdome Gold Mines has a ROCE of 16%. On its own, that’s a standard return, but it’s far better than the 3.3% generated by the metals and mining industry.

See our latest analysis for the Wesdome Gold Mines

TSX: WDO Return on capital employed on October 1, 2021

In the chart above, we’ve measured Wesdome Gold Mines past ROCE versus past performance, but arguably the future is more important. If you like, you can view analyst forecasts covering Wesdome Gold Mines here for free.

The ROCE trend

We are delighted to see that Wesdome Gold Mines is reaping the rewards of its investments and is now generating pre-tax profits. Shareholders will no doubt be delighted because the company was in deficit five years ago but now generates 16% of its capital. And unsurprisingly, like most companies trying to break into the dark, Wesdome Gold Mines is using 261% more capital than it was five years ago. This may indicate that there are many opportunities to invest capital internally and at ever higher rates, two common characteristics of a multi-bagger.

What we can learn from the ROCE of Wesdome Gold Mines

In summary, it’s great to see that Wesdome Gold Mines has managed to break into profitability and continues to reinvest in its business. And a remarkable 323% total return over the past five years tells us that investors expect more good things to come in the future. In light of this, we think it’s worth digging into this title further, because if Wesdome Gold Mines can maintain these trends, it could have a bright future.

Since virtually every business faces risks, it’s worth knowing about them, and we’ve spotted 2 warning signs for the Wesdome gold mines (of which 1 is significant!) that you should know.

Although Wesdome Gold Mines doesn’t generate the highest return, check out this free list of companies that generate high returns on equity with strong balance sheets.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.

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