If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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 A-Mark Precious Metals' (NASDAQ:AMRK) returns on capital, so let's have a look.

What Is Return On Capital Employed (ROCE)?

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 A-Mark Precious Metals is:

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

0.06 = US$62m ÷ (US$2.0b - US$990m) (Based on the trailing twelve months to September 2024).

Therefore, A-Mark Precious Metals has an ROCE of 6.0%. Ultimately, that's a low return and it under-performs the Retail Distributors industry average of 14%.

View our latest analysis for A-Mark Precious Metals

In the above chart we have measured A-Mark Precious Metals' 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 A-Mark Precious Metals .

How Are Returns Trending?

The fact that A-Mark Precious Metals 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 6.0% on its capital. And unsurprisingly, like most companies trying to break into the black, A-Mark Precious Metals is utilizing 512% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a related note, the company's ratio of current liabilities to total assets has decreased to 49%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

In Conclusion...

In summary, it's great to see that A-Mark Precious Metals has managed to break into profitability and is continuing to reinvest in its business. And a remarkable 735% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if A-Mark Precious Metals can keep these trends up, it could have a bright future ahead.

A-Mark Precious Metals does come with some risks though, we found 5 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

While A-Mark Precious Metals 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.