What are the early trends we should look for to identify a stock that could 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Micropole’s (EPA:MUN) returns on capital, so let’s have a look.
What is Return On Capital Employed (ROCE)?
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. The formula for this calculation on Micropole is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.072 = €5.6m ÷ (€140m – €62m) (Based on the trailing twelve months to December 2019).
Thus, Micropole has an ROCE of 7.2%. Ultimately, that’s a low return and it under-performs the IT industry average of 13%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Micropole’s ROCE against it’s prior returns. If you’re interested in investigating Micropole’s past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Micropole Tell Us?
Even though ROCE is still low in absolute terms, it’s good to see it’s heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 7.2%. The amount of capital employed has increased too, by 30%. So we’re very much inspired by what we’re seeing at Micropole thanks to its ability to profitably reinvest capital.Another thing to note, Micropole has a high ratio of current liabilities to total assets of 44%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it’s not necessarily a bad thing, it can be beneficial if this ratio is lower.
To sum it up, Micropole has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with a respectable 51% awarded to those who held the stock over the last five years, you could argue that these trends are starting to get the attention they deserve. In light of that, we think it’s worth looking further into this stock because if Micropole can keep these trends up, it could have a bright future ahead.
One more thing, we’ve spotted 3 warning signs facing Micropole that you might find interesting.
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. 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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