Returns On Capital Are A Standout For Exxaro Resources (JSE:EXX)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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 the ROCE trend of Exxaro Resources (JSE:EXX) we really liked what we saw.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Exxaro Resources:

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

0.20 = R16b ÷ (R85b - R5.2b) (Based on the trailing twelve months to December 2022).

So, Exxaro Resources has an ROCE of 20%. In absolute terms that's a very respectable return and compared to the Oil and Gas industry average of 24% it's pretty much on par.

View our latest analysis for Exxaro Resources

In the above chart we have measured Exxaro 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 report for Exxaro Resources.

What The Trend Of ROCE Can Tell Us

The trends we've noticed at Exxaro Resources are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 20%. The amount of capital employed has increased too, by 41%. So we're very much inspired by what we're seeing at Exxaro Resources thanks to its ability to profitably reinvest capital.

The Key Takeaway

In summary, it's great to see that Exxaro Resources can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And a remarkable 163% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Exxaro Resources can keep these trends up, it could have a bright future ahead.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Exxaro Resources (of which 1 makes us a bit uncomfortable!) that you should know about.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.

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