To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Majestic Gold (CVE:MJS) and its trend of ROCE, we really liked what we saw.

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. The formula for this calculation on Majestic Gold is:

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

0.13 = US$23m ÷ (US$195m - US$23m) (Based on the trailing twelve months to June 2024).

Therefore, Majestic Gold has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 3.1% generated by the Metals and Mining industry.

Check out our latest analysis for Majestic Gold

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'd like to look at how Majestic Gold has performed in the past in other metrics, you can view this free graph of Majestic Gold's past earnings, revenue and cash flow.

What Can We Tell From Majestic Gold's ROCE Trend?

Investors would be pleased with what's happening at Majestic Gold. The data shows that returns on capital have increased substantially over the last five years to 13%. The amount of capital employed has increased too, by 74%. So we're very much inspired by what we're seeing at Majestic Gold thanks to its ability to profitably reinvest capital.

What We Can Learn From Majestic Gold's ROCE

To sum it up, Majestic Gold has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a solid 59% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Majestic Gold can keep these trends up, it could have a bright future ahead.

On a separate note, we've found 1 warning sign for Majestic Gold you'll probably want to know about.

While Majestic Gold isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.