Here’s What’s Happening With Returns At M.T.I Wireless Edge (LON:MWE)

There are a few key trends to look for if we want to identify the next 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. 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 on that note, M.T.I Wireless Edge (LON:MWE) looks quite promising in regards to its trends of return on capital.

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. To calculate this metric for M.T.I Wireless Edge, this is the formula:

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

0.16 = US$4.0m ÷ (US$34m - US$8.7m) (Based on the trailing twelve months to September 2020).

So, M.T.I Wireless Edge has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 7.6% generated by the Communications industry.

See our latest analysis for M.T.I Wireless Edge

Above you can see how the current ROCE for M.T.I Wireless Edge compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering M.T.I Wireless Edge here for free.

So How Is M.T.I Wireless Edge's ROCE Trending?

M.T.I Wireless Edge is showing promise given that its ROCE is trending up and to the right. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 181% over the last five years. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

Our Take On M.T.I Wireless Edge's ROCE

As discussed above, M.T.I Wireless Edge appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Since the stock has returned a staggering 362% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if M.T.I Wireless Edge can keep these trends up, it could have a bright future ahead.

M.T.I Wireless Edge does have some risks though, and we've spotted 2 warning signs for M.T.I Wireless Edge that you might be interested in.

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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This article by Simply Wall St is general in nature. 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.
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