To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Mountain Province Diamonds (TSE:MPVD) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Mountain Province Diamonds, this is the formula:

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

0.065 = CA$53m ÷ (CA$878m - CA$65m) (Based on the trailing twelve months to June 2024).

So, Mountain Province Diamonds has an ROCE of 6.5%. In absolute terms, that's a low return, but it's much better than the Metals and Mining industry average of 3.2%.

View our latest analysis for Mountain Province Diamonds

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

What Does the ROCE Trend For Mountain Province Diamonds Tell Us?

Mountain Province Diamonds has not disappointed with their ROCE growth. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 44% over the last five years. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

What We Can Learn From Mountain Province Diamonds' ROCE

In summary, we're delighted to see that Mountain Province Diamonds has been able to increase efficiencies and earn higher rates of return on the same amount of capital. However the stock is down a substantial 88% in the last five years so there could be other areas of the business hurting its prospects. Still, it's worth doing some further research to see if the trends will continue into the future.

One more thing to note, we've identified 2 warning signs with Mountain Province Diamonds and understanding them should be part of your investment process.

While Mountain Province Diamonds 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.