What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Serabi Gold's (LON:SRB) returns on capital, so let's have a look.

What Is 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 Serabi Gold is:

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

0.10 = US$10m ÷ (US$115m - US$15m) (Based on the trailing twelve months to June 2024).

Therefore, Serabi Gold has an ROCE of 10.0%. In absolute terms, that's a low return but it's around the Metals and Mining industry average of 8.8%.

Check out our latest analysis for Serabi Gold

In the above chart we have measured Serabi Gold's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Serabi Gold for free.

So How Is Serabi Gold's ROCE Trending?

The fact that Serabi Gold is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 10.0% which is a sight for sore eyes. Not only that, but the company is utilizing 36% more capital than before, but that's to be expected from a company 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 related note, the company's ratio of current liabilities to total assets has decreased to 13%, which basically reduces it's funding from the likes of short-term creditors or suppliers. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

Our Take On Serabi Gold's ROCE

Overall, Serabi Gold gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 1.8% 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.