Mediacle Group (NGM:MEGR) Might Have The Makings Of A Multi-Bagger

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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 Mediacle Group (NGM:MEGR) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Mediacle Group, this is the formula:

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

0.11 = kr10m ÷ (kr123m - kr30m) (Based on the trailing twelve months to June 2021).

Therefore, Mediacle Group has an ROCE of 11%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Online Retail industry average of 10%.

Check out our latest analysis for Mediacle Group

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

The Trend Of ROCE

The fact that Mediacle Group is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 11% on its capital. Not only that, but the company is utilizing 3,646% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 24% of the business, which is more than it was five years ago. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

What We Can Learn From Mediacle Group's ROCE

Long story short, we're delighted to see that Mediacle Group's reinvestment activities have paid off and the company is now profitable. Since the stock has returned a solid 42% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Like most companies, Mediacle Group does come with some risks, and we've found 2 warning signs that you should be aware of.

While Mediacle Group 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.

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.

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