MP Materials (NYSE:MP) Might Have The Makings Of A Multi-Bagger

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at MP Materials (NYSE:MP) and its trend of ROCE, we really liked what we saw.

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. The formula for this calculation on MP Materials is:

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

0.0045 = US$9.9m ÷ (US$2.3b - US$109m) (Based on the trailing twelve months to December 2023).

So, MP Materials has an ROCE of 0.4%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 9.4%.

View our latest analysis for MP Materials

In the above chart we have measured MP Materials' 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 analyst report for MP Materials .

What Can We Tell From MP Materials' ROCE Trend?

MP Materials has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 0.4% on its capital. And unsurprisingly, like most companies trying to break into the black, MP Materials is utilizing 2,943% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

On a related note, the company's ratio of current liabilities to total assets has decreased to 4.6%, which basically reduces it's funding from the likes of short-term creditors or suppliers. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

The Bottom Line

Long story short, we're delighted to see that MP Materials' reinvestment activities have paid off and the company is now profitable. Astute investors may have an opportunity here because the stock has declined 47% in the last three years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

MP Materials does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those can't be ignored...

While MP Materials 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.