Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at REX American Resources (NYSE:REX) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for REX American Resources, this is the formula:

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

0.12 = US$76m ÷ (US$680m - US$52m) (Based on the trailing twelve months to July 2024).

So, REX American Resources has an ROCE of 12%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Oil and Gas industry average of 11%.

Above you can see how the current ROCE for REX American Resources compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering REX American Resources for free.

What Can We Tell From REX American Resources' ROCE Trend?

The fact that REX American Resources is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 12% which is a sight for sore eyes. In addition to that, REX American Resources is employing 33% more capital than previously which is expected of a company that's trying to break into profitability. 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.

The Key Takeaway

Overall, REX American Resources gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 70% return over the last five years. In light of that, we think it's worth looking further into this stock because if REX American Resources can keep these trends up, it could have a bright future ahead.

While REX American Resources looks impressive, no company is worth an infinite price. The intrinsic value infographic for REX helps visualize whether it is currently trading for a fair price.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.