If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Latrobe Magnesium (ASX:LMG) so let's look a bit deeper.

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 Latrobe Magnesium is:

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

0.0081 = AU$635k ÷ (AU$87m - AU$8.5m) (Based on the trailing twelve months to December 2024).

Thus, Latrobe Magnesium has an ROCE of 0.8%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 9.1%.

See our latest analysis for Latrobe Magnesium

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Latrobe Magnesium.

So How Is Latrobe Magnesium's ROCE Trending?

The fact that Latrobe Magnesium 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 0.8% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Latrobe Magnesium is utilizing 1,515% 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 9.7%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Bottom Line

Long story short, we're delighted to see that Latrobe Magnesium's reinvestment activities have paid off and the company is now profitable. Since the stock has returned a solid 63% to shareholders over the last five years, it's fair to say investors are beginning to recognize 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.

Latrobe Magnesium does have some risks, we noticed 6 warning signs (and 4 which shouldn't be ignored) we think you should know about.

While Latrobe Magnesium may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.