If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, MTQ (SGX:M05) looks quite promising in regards to its trends of return on capital.
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. Analysts use this formula to calculate it for MTQ:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.068 = S$6.2m ÷ (S$105m - S$14m) (Based on the trailing twelve months to September 2020).
Thus, MTQ has an ROCE of 6.8%. On its own that's a low return, but compared to the average of 3.7% generated by the Energy Services industry, it's much better.
View 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're interested in investigating MTQ's past further, check out this free graph of past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
MTQ has not disappointed in regards to ROCE growth. The figures show that over the last five years, returns on capital have grown by 2,491%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. In regards to capital employed, MTQ appears to been achieving more with less, since the business is using 51% less capital to run its operation. MTQ may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
The Key Takeaway
In a nutshell, we're pleased to see that MTQ has been able to generate higher returns from less capital. Astute investors may have an opportunity here because the stock has declined 47% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.
MTQ does have some risks though, and we've spotted 3 warning signs for MTQ that you might be interested in.
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 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.
