If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in EMX Royalty's (CVE:EMX) returns on capital, so let's have a look.

Understanding 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 EMX Royalty is:

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

0.024 = US$2.9m ÷ (US$159m - US$37m) (Based on the trailing twelve months to December 2023).

So, EMX Royalty has an ROCE of 2.4%. Even though it's in line with the industry average of 1.5%, it's still a low return by itself.

Check out our latest analysis for EMX Royalty

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

What Can We Tell From EMX Royalty's ROCE Trend?

The fact that EMX Royalty 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 2.4% on its capital. In addition to that, EMX Royalty is employing 53% 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.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 24% of the business, which is more than it was five years ago. 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.