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. 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. Speaking of which, we noticed some great changes in Mercuries Data Systems' (TPE:2427) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What is it?
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 Mercuries Data Systems, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.048 = NT$113m ÷ (NT$4.4b - NT$2.1b) (Based on the trailing twelve months to December 2020).
So, Mercuries Data Systems has an ROCE of 4.8%. In absolute terms, that's a low return and it also under-performs the IT industry average of 17%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Mercuries Data Systems' ROCE against it's prior returns. If you're interested in investigating Mercuries Data Systems' past further, check out this free graph of past earnings, revenue and cash flow.
So How Is Mercuries Data Systems' ROCE Trending?
While there are companies with higher returns on capital out there, we still find the trend at Mercuries Data Systems promising. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 359% in that same time. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
Another thing to note, Mercuries Data Systems has a high ratio of current liabilities to total assets of 47%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Bottom Line On Mercuries Data Systems' ROCE
In summary, we're delighted to see that Mercuries Data Systems has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And a remarkable 112% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.
On a final note, we've found 3 warning signs for Mercuries Data Systems that we think 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.
If you’re looking to trade Mercuries Data Systems, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account.
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.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.