Mphasis (NSE:MPHASIS) Is Very Good At Capital Allocation

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. 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 when we looked at the ROCE trend of Mphasis (NSE:MPHASIS) we really liked what we saw.

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. Analysts use this formula to calculate it for Mphasis:

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

0.23 = ₹16b ÷ (₹94b - ₹21b) (Based on the trailing twelve months to June 2021).

So, Mphasis has an ROCE of 23%. In absolute terms that's a great return and it's even better than the IT industry average of 11%.

Check out our latest analysis for Mphasis

Above you can see how the current ROCE for Mphasis compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Mphasis here for free.

What Does the ROCE Trend For Mphasis Tell Us?

Mphasis is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 68% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

In Conclusion...

To sum it up, Mphasis is collecting higher returns from the same amount of capital, and that's impressive. And a remarkable 445% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

On a separate note, we've found 3 warning signs for Mphasis you'll probably want to know about.

Mphasis 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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