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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Winsome Resources (ASX:WR1) and its trend of ROCE, we really liked what we saw.

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. Analysts use this formula to calculate it for Winsome Resources:

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

0.039 = AU$4.6m ÷ (AU$131m - AU$13m) (Based on the trailing twelve months to June 2024).

So, Winsome Resources has an ROCE of 3.9%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 10%.

Check out our latest analysis for Winsome Resources

In the above chart we have measured Winsome Resources' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Winsome Resources .

What The Trend Of ROCE Can Tell Us

We're delighted to see that Winsome Resources is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses two years ago, but now it's earning 3.9% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Winsome Resources is utilizing 376% more capital than it was two years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

In Conclusion...

Overall, Winsome Resources gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Given the stock has declined 68% in the last year, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

On a final note, we found 5 warning signs for Winsome Resources (1 is concerning) you should be aware of.