Investors Met With Slowing Returns on Capital At Macpower CNC Machines (NSE:MACPOWER)

Did you know there are some financial metrics that can provide clues of a potential 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So, when we ran our eye over Macpower CNC Machines' (NSE:MACPOWER) trend of ROCE, we liked what we saw.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Macpower CNC Machines is:

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

0.17 = ₹173m ÷ (₹1.4b - ₹440m) (Based on the trailing twelve months to March 2023).

Therefore, Macpower CNC Machines has an ROCE of 17%. That's a relatively normal return on capital, and it's around the 16% generated by the Machinery industry.

See our latest analysis for Macpower CNC Machines

Historical performance is a great place to start when researching a stock so above you can see the gauge for Macpower CNC Machines' ROCE against it's prior returns. If you're interested in investigating Macpower CNC Machines' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Macpower CNC Machines Tell Us?

While the returns on capital are good, they haven't moved much. The company has employed 84% more capital in the last five years, and the returns on that capital have remained stable at 17%. 17% is a pretty standard return, and it provides some comfort knowing that Macpower CNC Machines has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 31% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.

Our Take On Macpower CNC Machines' ROCE

To sum it up, Macpower CNC Machines has simply been reinvesting capital steadily, at those decent rates of return. However, over the last five years, the stock has only delivered a 25% return to shareholders who held over that period. So to determine if Macpower CNC Machines is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

One more thing, we've spotted 2 warning signs facing Macpower CNC Machines that you might find interesting.

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.

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.