If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Mastermyne Group (ASX:MYE) looks quite promising in regards to its trends of return on capital.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Mastermyne Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = AU$14m ÷ (AU$127m - AU$42m) (Based on the trailing twelve months to December 2020).
Therefore, Mastermyne Group has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Metals and Mining industry average of 8.9% it's much better.
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're interested in investigating Mastermyne Group's past further, check out this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
We like the trends that we're seeing from Mastermyne Group. Over the last five years, returns on capital employed have risen substantially to 16%. The amount of capital employed has increased too, by 24%. So we're very much inspired by what we're seeing at Mastermyne Group thanks to its ability to profitably reinvest capital.
The Key Takeaway
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Mastermyne Group has. Since the stock has returned a staggering 738% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
One more thing to note, we've identified 4 warning signs with Mastermyne Group and understanding them should be part of your investment process.
While Mastermyne Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
When trading Mastermyne Group or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted
Valuation is complex, but we're helping make it simple.
Find out whether Metarock Group is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.View the Free Analysis
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.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
Metarock Group Limited provides mining, contracting, training, and related services to the underground long wall mining operations and industrial products and services in coalfields and supporting industries of Queensland and New South Wales, Australia.
Undervalued with reasonable growth potential.