Macquarie Telecom Group (ASX:MAQ) Is Experiencing Growth In Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. 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 Macquarie Telecom Group (ASX:MAQ) and its trend of ROCE, we really liked what we saw.

Understanding 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. To calculate this metric for Macquarie Telecom Group, this is the formula:

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

0.083 = AU$25m ÷ (AU$363m - AU$65m) (Based on the trailing twelve months to December 2020).

Therefore, Macquarie Telecom Group has an ROCE of 8.3%. On its own that's a low return, but compared to the average of 5.4% generated by the Telecom industry, it's much better.

View our latest analysis for Macquarie Telecom Group

Above you can see how the current ROCE for Macquarie Telecom Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Macquarie Telecom Group.

What Can We Tell From Macquarie Telecom Group's ROCE Trend?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 8.3%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 242%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

The Bottom Line On Macquarie Telecom Group's ROCE

All in all, it's terrific to see that Macquarie Telecom Group is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 359% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you'd like to know more about Macquarie Telecom Group, we've spotted 2 warning signs, and 1 of them is significant.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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