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Highlights
- Regis Resources (ASX:RRL) shows a declining trend in Return on Capital Employed (ROCE).
- The company's increasing capital employed and revenue may indicate long-term growth potential.
- Regis Resources' stock has declined 22% over the last five years.
In the pursuit of stocks that have the potential to grow significantly over the long term, identifying trends such as increasing returns on capital employed (ROCE) alongside a growing amount of capital employed is crucial. Essentially, this indicates that a company is successfully reinvesting in profitable ventures, acting as a compounding growth engine. However, upon examining Regis Resources (ASX:RRL) and its ROCE trends, the numbers fall short of generating excitement.
Understanding Return on Capital Employed (ROCE)
ROCE measures a company’s annual pre-tax profit relative to the capital employed in its operations. It is calculated using the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
For Regis Resources, this calculation amounts to:
0.016 = AU$29m ÷ (AU$2.3b - AU$449m) (Based on trailing twelve months to December 2024).
Thus, Regis Resources has an ROCE of 1.6%, which is low in absolute terms and below the 9.7% Metals and Mining industry average.
What the ROCE Trend Indicates
Historically, the trend of ROCE for Regis Resources has not been encouraging. Over the past five years, ROCE has dwindled from 26% to 1.6%. Despite this, the company has seen growth in both capital employed and revenue. These developments suggest that the company is focusing on growth initiatives that may impact short-term returns but could positively affect long-term performance.
Additionally, current liabilities have increased over the last five years to 20% of total assets, marginally skewing the ROCE. If these liabilities rise significantly, it might introduce new risks, requiring cautious observation.
Conclusion
The decrease in short-term returns for Regis Resources underscores an intriguing aspect as both revenue and capital employed are on the rise. Considering that the stock has declined by 22% over the past five years, further research into its other fundamentals could be valuable.
While its current returns may not be the highest, exploring our platform's intrinsic value estimation could reveal attractive pricing facets in other respects. Furthermore, for those interested, a list of companies with over 25% return on equity is available for comparison.
