Returns On Capital At Materialise (NASDAQ:MTLS) Paint A Concerning Picture

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Although, when we looked at Materialise (NASDAQ:MTLS), it didn't seem to tick all of these boxes.

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. Analysts use this formula to calculate it for Materialise:

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

0.0046 = €1.4m ÷ (€408m - €105m) (Based on the trailing twelve months to March 2023).

Thus, Materialise has an ROCE of 0.5%. In absolute terms, that's a low return and it also under-performs the Software industry average of 10%.

See our latest analysis for Materialise

Above you can see how the current ROCE for Materialise 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 Materialise here for free.

What The Trend Of ROCE Can Tell Us

In terms of Materialise's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 1.7%, but since then they've fallen to 0.5%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From Materialise's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Materialise. However, despite the promising trends, the stock has fallen 26% over the last five years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

If you'd like to know about the risks facing Materialise, we've discovered 2 warning signs that you should be aware of.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.