Shareholders Would Enjoy A Repeat Of MSTC's (NSE:MSTCLTD) Recent Growth In Returns

There are a few key trends to look for if we want to identify the next multi-bagger. 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. 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 MSTC (NSE:MSTCLTD) looks great, so lets see what the trend can tell us.

What Is 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 MSTC is:

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

0.37 = ₹3.3b ÷ (₹27b - ₹18b) (Based on the trailing twelve months to March 2023).

Therefore, MSTC has an ROCE of 37%. In absolute terms that's a great return and it's even better than the Trade Distributors industry average of 5.2%.

Check out our latest analysis for MSTC

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

SWOT Analysis for MSTC

What The Trend Of ROCE Can Tell Us

MSTC's ROCE growth is quite impressive. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 138% in that same time. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

One more thing to note, MSTC has decreased current liabilities to 67% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.

What We Can Learn From MSTC's ROCE

To sum it up, MSTC is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has returned a staggering 195% to shareholders over the last three years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing, we've spotted 1 warning sign facing MSTC that you might find interesting.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.