If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So, when we ran our eye over Microware Group's (HKG:1985) trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What is it?
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. Analysts use this formula to calculate it for Microware Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.27 = HK$57m ÷ (HK$467m - HK$253m) (Based on the trailing twelve months to September 2020).
Thus, Microware Group has an ROCE of 27%. In absolute terms that's a great return and it's even better than the IT industry average of 8.6%.
Check out our latest analysis for Microware Group
Historical performance is a great place to start when researching a stock so above you can see the gauge for Microware Group's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Microware Group, check out these free graphs here.
So How Is Microware Group's ROCE Trending?
Microware Group deserves to be commended in regards to it's returns. The company has employed 61% more capital in the last five years, and the returns on that capital have remained stable at 27%. Now considering ROCE is an attractive 27%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If Microware Group can keep this up, we'd be very optimistic about its future.
One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 54% of total assets, is good to see from a business owner's perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously. Although because current liabilities are still 54%, some of that risk is still prevalent.
The Bottom Line On Microware Group's ROCE
In short, we'd argue Microware Group has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. Despite the good fundamentals, total returns from the stock have been virtually flat over the last three years. For that reason, savvy investors might want to look further into this company in case it's a prime investment.
One more thing to note, we've identified 2 warning signs with Microware Group and understanding them should be part of your investment process.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
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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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About SEHK:1985
Microware Group
An investment holding company, provides information technology (IT) infrastructure solutions and IT managed services in Hong Kong.
Adequate balance sheet with acceptable track record.
