What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Mensch und Maschine Software's (ETR:MUM) returns on capital, so let's have a look.
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. The formula for this calculation on Mensch und Maschine Software is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.26 = €30m ÷ (€167m - €54m) (Based on the trailing twelve months to March 2021).
Thus, Mensch und Maschine Software has an ROCE of 26%. That's a fantastic return and not only that, it outpaces the average of 13% earned by companies in a similar industry.
In the above chart we have measured Mensch und Maschine Software's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Mensch und Maschine Software.
What The Trend Of ROCE Can Tell Us
We like the trends that we're seeing from Mensch und Maschine Software. The data shows that returns on capital have increased substantially over the last five years to 26%. Basically the business is earning more per dollar of capital invested and in addition to that, 50% more capital is being employed now too. 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 Key Takeaway
To sum it up, Mensch und Maschine Software 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 416% 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.
If you want to continue researching Mensch und Maschine Software, you might be interested to know about the 1 warning sign that our analysis has discovered.
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
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