What Can The Trends At Murray Cod Australia (ASX:MCA) Tell Us About Their Returns?

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. So when we looked at Murray Cod Australia (ASX:MCA) and its trend of ROCE, we really liked what we saw.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Murray Cod Australia:

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

0.008 = AU$282k ÷ (AU$37m - AU$1.4m) (Based on the trailing twelve months to June 2020).

So, Murray Cod Australia has an ROCE of 0.8%. Ultimately, that's a low return and it under-performs the Food industry average of 5.2%.

View our latest analysis for Murray Cod Australia

Above you can see how the current ROCE for Murray Cod Australia compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Murray Cod Australia Tell Us?

We're delighted to see that Murray Cod Australia 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 four years ago but is is now generating 0.8% on its capital. In addition to that, Murray Cod Australia is employing 23,917% more capital than previously which is expected of a company that's trying to break into profitability. 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.

One more thing to note, Murray Cod Australia has decreased current liabilities to 3.7% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

What We Can Learn From Murray Cod Australia's ROCE

To the delight of most shareholders, Murray Cod Australia has now broken into profitability. And with the stock having performed exceptionally well over the last three years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Murray Cod Australia does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is a bit concerning...

While Murray Cod Australia isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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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