Will The ROCE Trend At Macquarie Telecom Group (ASX:MAQ) Continue?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Macquarie Telecom Group (ASX:MAQ) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Macquarie Telecom Group:

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

0.093 = AU$24m ÷ (AU$324m - AU$68m) (Based on the trailing twelve months to June 2020).

Thus, Macquarie Telecom Group has an ROCE of 9.3%. Even though it's in line with the industry average of 9.3%, it's still a low return by itself.

See 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.

How Are Returns Trending?

The fact that Macquarie Telecom Group is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 9.3% on its capital. And unsurprisingly, like most companies trying to break into the black, Macquarie Telecom Group is utilizing 185% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 21%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

The Bottom Line

In summary, it's great to see that Macquarie Telecom Group has managed to break into profitability and is continuing to reinvest in its business. And a remarkable 563% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Macquarie Telecom Group can keep these trends up, it could have a bright future ahead.

One more thing, we've spotted 1 warning sign facing Macquarie Telecom Group that you might find interesting.

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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