What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. That's why when we briefly looked at Micro-Mechanics (Holdings)'s (SGX:5DD) ROCE trend, we were very happy with what we saw.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Micro-Mechanics (Holdings), this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.30 = S$20m ÷ (S$77m - S$11m) (Based on the trailing twelve months to September 2020).
Therefore, Micro-Mechanics (Holdings) has an ROCE of 30%. That's a fantastic return and not only that, it outpaces the average of 14% earned by companies in a similar industry.
View our latest analysis for Micro-Mechanics (Holdings)
In the above chart we have measured Micro-Mechanics (Holdings)'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.
The Trend Of ROCE
We'd be pretty happy with returns on capital like Micro-Mechanics (Holdings). The company has employed 30% more capital in the last five years, and the returns on that capital have remained stable at 30%. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If Micro-Mechanics (Holdings) can keep this up, we'd be very optimistic about its future.
In Conclusion...
In summary, we're delighted to see that Micro-Mechanics (Holdings) has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. On top of that, the stock has rewarded shareholders with a remarkable 313% return to those who've held over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.
Like most companies, Micro-Mechanics (Holdings) does come with some risks, and we've found 1 warning sign that you should be aware of.
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
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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:5DD
Micro-Mechanics (Holdings)
Designs, manufactures, and markets high precision parts and tools used in applications for the wafer-fabrication, assembly, and testing processes of the semiconductor industry in Singapore, Malaysia, the Philippines, the United States, China, Thailand, Taiwan, Europe, Japan, and internationally.
Flawless balance sheet with acceptable track record.
