What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, EMX Royalty (CVE:EMX) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for EMX Royalty, this is the formula:

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

0.04 = US$4.7m ÷ (US$156m - US$38m) (Based on the trailing twelve months to June 2024).

Thus, EMX Royalty has an ROCE of 4.0%. In absolute terms, that's a low return, but it's much better than the Metals and Mining industry average of 3.3%.

See our latest analysis for EMX Royalty

In the above chart we have measured EMX Royalty's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for EMX Royalty .

What Does the ROCE Trend For EMX Royalty Tell Us?

EMX Royalty has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 4.0% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, EMX Royalty is utilizing 51% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. 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. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

The Bottom Line

To the delight of most shareholders, EMX Royalty has now broken into profitability. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 29% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for EMX Royalty (of which 1 can't be ignored!) that you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.