Returns Are Gaining Momentum At Micropole (EPA:MUN)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. So on that note, Micropole (EPA:MUN) 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 Micropole is:

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

0.073 = €5.6m ÷ (€139m - €62m) (Based on the trailing twelve months to June 2020).

Thus, Micropole has an ROCE of 7.3%. In absolute terms, that's a low return and it also under-performs the IT industry average of 12%.

View our latest analysis for Micropole

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'd like to look at how Micropole has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Micropole'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 7.3%. 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 21%. So we're very much inspired by what we're seeing at Micropole thanks to its ability to profitably reinvest capital.

Another thing to note, Micropole has a high ratio of current liabilities to total assets of 45%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Micropole's ROCE

In summary, it's great to see that Micropole can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 67% return over the last five years. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a separate note, we've found 3 warning signs for Micropole you'll probably want to know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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