Maytronics (TLV:MTRN) Will Be Hoping To Turn Its Returns On Capital Around

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Maytronics (TLV:MTRN), they do have a high ROCE, but we weren't exactly elated from how returns are trending.

Understanding 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 Maytronics is:

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

0.25 = ₪296m ÷ (₪2.0b - ₪869m) (Based on the trailing twelve months to September 2022).

Thus, Maytronics has an ROCE of 25%. That's a fantastic return and not only that, it outpaces the average of 6.4% earned by companies in a similar industry.

See our latest analysis for Maytronics

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're interested in investigating Maytronics' past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Maytronics' historical ROCE movements, the trend isn't fantastic. Historically returns on capital were even higher at 32%, but they have dropped over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Maytronics' current liabilities have increased over the last five years to 43% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 25%. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

The Bottom Line On Maytronics' ROCE

While returns have fallen for Maytronics in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And long term investors must be optimistic going forward because the stock has returned a huge 148% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

Maytronics does have some risks, we noticed 4 warning signs (and 2 which are a bit unpleasant) we think you should know about.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.