What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. With that in mind, the ROCE of Maytronics (TLV:MTRN) looks attractive right now, so lets see what the trend of returns can tell us.
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. Analysts use this formula to calculate it for Maytronics:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.35 = ₪246m ÷ (₪1.3b - ₪561m) (Based on the trailing twelve months to March 2021).
Thus, Maytronics has an ROCE of 35%. In absolute terms that's a great return and it's even better than the Consumer Durables industry average of 19%.
View our latest analysis for Maytronics
Historical performance is a great place to start when researching a stock so above you can see the gauge for Maytronics' ROCE against it's prior returns. If you'd like to look at how Maytronics has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Maytronics Tell Us?
Maytronics deserves to be commended in regards to it's returns. The company has consistently earned 35% for the last five years, and the capital employed within the business has risen 141% in that time. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Maytronics can keep this up, we'd be very optimistic about its future.
On a separate but related note, it's important to know that Maytronics has a current liabilities to total assets ratio of 44%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
Our Take On Maytronics' ROCE
In short, we'd argue Maytronics has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. And long term investors would be thrilled with the 571% return they've received over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.
Maytronics does have some risks though, and we've spotted 1 warning sign for Maytronics that you might be interested in.
Maytronics is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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About TASE:MTRN
Maytronics
Engages in the development, production, marketing, distribution, and technical support of swimming pool equipment in Israel, North America, Europe, Oceania, and internationally.
Moderate with imperfect balance sheet.
