What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Speaking of which, we noticed some great changes in Focus Minerals' (ASX:FML) returns on capital, so let's have a look.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Focus Minerals, this is the formula:

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

0.063 = AU$14m ÷ (AU$324m - AU$100m) (Based on the trailing twelve months to December 2024).

Therefore, Focus Minerals has an ROCE of 6.3%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 8.6%.

View our latest analysis for Focus Minerals

Historical performance is a great place to start when researching a stock so above you can see the gauge for Focus Minerals' ROCE against it's prior returns. If you'd like to look at how Focus Minerals has performed in the past in other metrics, you can view this free graph of Focus Minerals' past earnings, revenue and cash flow.

So How Is Focus Minerals' ROCE Trending?

The fact that Focus Minerals is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 6.3% on its capital. In addition to that, Focus Minerals is employing 94% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 31% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

In Conclusion...

To the delight of most shareholders, Focus Minerals has now broken into profitability. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 15% to shareholders. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

On a final note, we found 2 warning signs for Focus Minerals (1 is a bit concerning) you should be aware of.

While Focus Minerals 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.