Investors Will Want M3 Technology's (TWSE:6799) Growth In ROCE To Persist

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. 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. 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 M3 Technology (TWSE:6799) and its trend of ROCE, we really liked what we saw.

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 M3 Technology, this is the formula:

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

0.12 = NT$181m ÷ (NT$1.7b - NT$171m) (Based on the trailing twelve months to September 2024).

Therefore, M3 Technology has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Electronic industry average of 7.4% it's much better.

Check out our latest analysis for M3 Technology

In the above chart we have measured M3 Technology's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering M3 Technology for free.

How Are Returns Trending?

The trends we've noticed at M3 Technology are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 12%. The amount of capital employed has increased too, by 480%. So we're very much inspired by what we're seeing at M3 Technology thanks to its ability to profitably reinvest capital.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 10%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

Our Take On M3 Technology's ROCE

In summary, it's great to see that M3 Technology can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And since the stock has fallen 68% over the last three years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

If you'd like to know about the risks facing M3 Technology, we've discovered 1 warning sign that you should be aware of.

While M3 Technology isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.