Micro-Mechanics (Holdings) (SGX:5DD) Might Become A Compounding Machine

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. That's why when we briefly looked at Micro-Mechanics (Holdings)'s (SGX:5DD) ROCE trend, we were very happy with what we saw.

Return On Capital Employed (ROCE): What is it?

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. The formula for this calculation on Micro-Mechanics (Holdings) is:

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

0.34 = S$20m ÷ (S$72m - S$12m) (Based on the trailing twelve months to December 2020).

Thus, Micro-Mechanics (Holdings) has an ROCE of 34%. That's a fantastic return and not only that, it outpaces the average of 7.1% earned by companies in a similar industry.

See our latest analysis for Micro-Mechanics (Holdings)

Above you can see how the current ROCE for Micro-Mechanics (Holdings) compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Micro-Mechanics (Holdings) Tell Us?

We'd be pretty happy with returns on capital like Micro-Mechanics (Holdings). The company has employed 21% more capital in the last five years, and the returns on that capital have remained stable at 34%. Now considering ROCE is an attractive 34%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

The Bottom Line On Micro-Mechanics (Holdings)'s ROCE

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 420% 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.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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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