If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Speaking of which, we noticed some great changes in Matica Fintec's (BIT:MFT) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What is it?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Matica Fintec, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.084 = €873k ÷ (€15m - €4.9m) (Based on the trailing twelve months to June 2020).
Therefore, Matica Fintec has an ROCE of 8.4%. Even though it's in line with the industry average of 7.9%, it's still a low return by itself.
View our latest analysis for Matica Fintec
In the above chart we have measured Matica Fintec's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Can We Tell From Matica Fintec's ROCE Trend?
Matica Fintec has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making two years ago but is is now generating 8.4% on its capital. Not only that, but the company is utilizing 43% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 32%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.
In Conclusion...
In summary, it's great to see that Matica Fintec has managed to break into profitability and is continuing to reinvest in its business. Astute investors may have an opportunity here because the stock has declined 25% in the last year. So researching this company further and determining whether or not these trends will continue seems justified.
If you want to know some of the risks facing Matica Fintec we've found 3 warning signs (2 are concerning!) that you should be aware of before investing here.
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.
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This article by Simply Wall St is general in nature. 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.
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About BIT:MFT
Matica Fintec
Designs, develops, manufactures, and markets security document issuance systems in Italy and internationally.
Excellent balance sheet and fair value.
