Will MT Genex's (TYO:9820) Growth In ROCE Persist?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at MT Genex (TYO:9820) so let's look a bit deeper.

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. To calculate this metric for MT Genex, this is the formula:

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

0.13 = JP¥430m ÷ (JP¥3.6b - JP¥292m) (Based on the trailing twelve months to September 2020).

Thus, MT Genex has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 10% generated by the Construction industry.

See our latest analysis for MT Genex

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

What The Trend Of ROCE Can Tell Us

MT Genex is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 13%. Basically the business is earning more per dollar of capital invested and in addition to that, 42% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Bottom Line

To sum it up, MT Genex has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 103% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if MT Genex can keep these trends up, it could have a bright future ahead.

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

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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