Mayfield Group Holdings (ASX:MYG) Shareholders Will Want The ROCE Trajectory To Continue

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Mayfield Group Holdings (ASX:MYG) looks quite promising in regards to its trends of return on capital.

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. Analysts use this formula to calculate it for Mayfield Group Holdings:

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

0.017 = AU$503k ÷ (AU$44m - AU$14m) (Based on the trailing twelve months to December 2022).

So, Mayfield Group Holdings has an ROCE of 1.7%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 5.1%.

See our latest analysis for Mayfield Group Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Mayfield Group Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Mayfield Group Holdings, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

We're delighted to see that Mayfield Group Holdings is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 1.7% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Mayfield Group Holdings is utilizing 258% 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.

One more thing to note, Mayfield Group Holdings has decreased current liabilities to 33% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

Our Take On Mayfield Group Holdings' ROCE

To the delight of most shareholders, Mayfield Group Holdings has now broken into profitability. Since the stock has returned a solid 16% to shareholders over the last year, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

On a final note, we found 4 warning signs for Mayfield Group Holdings (1 is potentially serious) you should be aware of.

While Mayfield Group Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.