Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Speaking of which, we noticed some great changes in Mastermyne Group's (ASX:MYE) returns on capital, so let's have a look.
Understanding 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 Mastermyne Group:
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).
Thus, 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 12% it's much better.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Mastermyne Group's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Mastermyne Group, check out these free graphs here.
So How Is Mastermyne Group's ROCE Trending?
The trends we've noticed at Mastermyne Group are quite reassuring. The data shows that returns on capital have increased substantially over the last five years 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 Bottom Line
To sum it up, Mastermyne Group has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a staggering 328% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Mastermyne Group can keep these trends up, it could have a bright future ahead.
One more thing to note, we've identified 4 warning signs with Mastermyne Group and understanding these 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.
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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.