What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. So when we looked at MTQ (SGX:M05) and its trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What Is It?
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 MTQ is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.061 = S$6.0m ÷ (S$125m - S$27m) (Based on the trailing twelve months to March 2023).
Therefore, MTQ has an ROCE of 6.1%. Even though it's in line with the industry average of 6.1%, it's still a low return by itself.
See our latest analysis for MTQ
Historical performance is a great place to start when researching a stock so above you can see the gauge for MTQ's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of MTQ, check out these free graphs here.
SWOT Analysis for MTQ
- Earnings growth over the past year exceeded the industry.
- Debt is well covered by earnings.
- Dividend is low compared to the top 25% of dividend payers in the Energy Services market.
- Current share price is above our estimate of fair value.
- Shareholders have been diluted in the past year.
- M05's financial characteristics indicate limited near-term opportunities for shareholders.
- Lack of analyst coverage makes it difficult to determine M05's earnings prospects.
- Debt is not well covered by operating cash flow.
- Paying a dividend but company has no free cash flows.
What Does the ROCE Trend For MTQ Tell Us?
MTQ has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 6.1% on its capital, because five years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.
Our Take On MTQ's ROCE
In summary, we're delighted to see that MTQ has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And with a respectable 46% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
If you'd like to know about the risks facing MTQ, we've discovered 3 warning signs that you should be aware of.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.
About SGX:M05
MTQ
Provides engineering solutions for oilfield equipment in Singapore, the Kingdom of Bahrain, Australia, United Arab Emirates, and the United Kingdom.
Flawless balance sheet low.
