Returns On Capital Signal Tricky Times Ahead For MLG Oz (ASX:MLG)

There are a few key trends to look for if we want to identify the next multi-bagger. 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. However, after briefly looking over the numbers, we don't think MLG Oz (ASX:MLG) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

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 MLG Oz is:

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

0.064 = AU$11m ÷ (AU$268m - AU$94m) (Based on the trailing twelve months to December 2022).

So, MLG Oz has an ROCE of 6.4%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 11%.

See our latest analysis for MLG Oz

In the above chart we have measured MLG Oz's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering MLG Oz here for free.

SWOT Analysis for MLG Oz

So How Is MLG Oz's ROCE Trending?

In terms of MLG Oz's historical ROCE movements, the trend isn't fantastic. Over the last four years, returns on capital have decreased to 6.4% from 25% four years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that MLG Oz is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 34% over the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

On a final note, we've found 2 warning signs for MLG Oz that we think you should be aware of.

While MLG Oz 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. 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.