Be Wary Of Made Tech Group (LON:MTEC) And Its Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. Although, when we looked at Made Tech Group (LON:MTEC), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Made Tech Group is:

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

0.024 = UK£359k ÷ (UK£20m - UK£5.2m) (Based on the trailing twelve months to November 2023).

Therefore, Made Tech Group has an ROCE of 2.4%. Ultimately, that's a low return and it under-performs the IT industry average of 12%.

View our latest analysis for Made Tech Group

Above you can see how the current ROCE for Made Tech 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 analyst report for Made Tech Group .

What Can We Tell From Made Tech Group's ROCE Trend?

When we looked at the ROCE trend at Made Tech Group, we didn't gain much confidence. To be more specific, ROCE has fallen from 26% over the last four years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Made Tech Group has decreased its current liabilities to 26% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

To conclude, we've found that Made Tech Group is reinvesting in the business, but returns have been falling. Since the stock has declined 53% over the last year, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Made Tech Group has the makings of a multi-bagger.

One more thing: We've identified 3 warning signs with Made Tech Group (at least 2 which can't be ignored) , and understanding these would certainly be useful.

While Made Tech Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.