We Like These Underlying Return On Capital Trends At Mayfield Group Holdings (ASX:MYG)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. With that in mind, we've noticed some promising trends at Mayfield Group Holdings (ASX:MYG) so let's look a bit deeper.

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. The formula for this calculation on Mayfield Group Holdings is:

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).

Therefore, Mayfield Group Holdings has an ROCE of 1.7%. Ultimately, that's a low return and it under-performs the Electrical industry average of 5.1%.

See our latest analysis for Mayfield Group Holdings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Mayfield Group Holdings, check out these free graphs here.

What Does the ROCE Trend For Mayfield Group Holdings 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. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 1.7% on its capital. Not only that, but the company is utilizing 258% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a related note, the company's ratio of current liabilities to total assets has decreased to 33%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Mayfield Group Holdings has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Bottom Line 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 84% to shareholders over the last year, it's fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a final note, we found 4 warning signs for Mayfield Group Holdings (1 can't be ignored) 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.