If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. However, after briefly looking over the numbers, we don't think Newmont (NYSE:NEM) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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 Newmont is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.023 = US$1.2b ÷ (US$55b - US$5.5b) (Based on the trailing twelve months to March 2024).
So, Newmont has an ROCE of 2.3%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 8.9%.
Above you can see how the current ROCE for Newmont compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Newmont .
The Trend Of ROCE
When we looked at the ROCE trend at Newmont, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 2.3% from 6.2% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
The Bottom Line On Newmont's ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Newmont. In light of this, the stock has only gained 27% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.
Newmont does have some risks, we noticed 2 warning signs (and 1 which is significant) we think you should know about.
While Newmont isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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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