Mazda (NSE:MAZDA) Is Doing The Right Things To Multiply Its Share Price

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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, Mazda (NSE:MAZDA) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Mazda, this is the formula:

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

0.17 = ₹288m ÷ (₹1.9b - ₹253m) (Based on the trailing twelve months to June 2022).

So, Mazda has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 14% it's much better.

Our analysis indicates that MAZDA is potentially undervalued!

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

What Does the ROCE Trend For Mazda Tell Us?

The trends we've noticed at Mazda are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 17%. The amount of capital employed has increased too, by 38%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

The Key Takeaway

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Mazda has. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 99% return over the last five years. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On a final note, we've found 2 warning signs for Mazda that we think you should be aware of.

While Mazda may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.