Stock Analysis

Returns Are Gaining Momentum At MP Materials (NYSE:MP)

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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in MP Materials' (NYSE:MP) returns on capital, so let's have a look.

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. Analysts use this formula to calculate it for MP Materials:

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

0.074 = US$132m ÷ (US$1.8b - US$71m) (Based on the trailing twelve months to September 2021).

So, MP Materials has an ROCE of 7.4%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 17%.

View our latest analysis for MP Materials

NYSE:MP Return on Capital Employed December 4th 2021

Above you can see how the current ROCE for MP Materials compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering MP Materials here for free.

So How Is MP Materials' ROCE Trending?

We're delighted to see that MP Materials is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making two years ago but is is now generating 7.4% on its capital. And unsurprisingly, like most companies trying to break into the black, MP Materials is utilizing 2,399% more capital than it was two years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

One more thing to note, MP Materials has decreased current liabilities to 3.8% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

Our Take On MP Materials' ROCE

Long story short, we're delighted to see that MP Materials' reinvestment activities have paid off and the company is now profitable. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 80% return over the last year. In light of that, we think it's worth looking further into this stock because if MP Materials can keep these trends up, it could have a bright future ahead.

If you'd like to know more about MP Materials, we've spotted 4 warning signs, and 1 of them doesn't sit too well with us.

While MP Materials may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

Valuation is complex, but we're helping make it simple.

Find out whether MP Materials is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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