Metrofile Holdings (JSE:MFL) Is Finding It Tricky To Allocate Its Capital

What financial metrics can indicate to us that a company is maturing or even in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. And from a first read, things don't look too good at Metrofile Holdings (JSE:MFL), so let's see why.

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Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Metrofile Holdings is:

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

0.15 = R188m ÷ (R1.5b - R216m) (Based on the trailing twelve months to December 2024).

So, Metrofile Holdings has an ROCE of 15%. In absolute terms, that's a pretty standard return but compared to the IT industry average it falls behind.

Check out our latest analysis for Metrofile Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Metrofile Holdings' ROCE against it's prior returns. If you'd like to look at how Metrofile Holdings has performed in the past in other metrics, you can view this free graph of Metrofile Holdings' past earnings, revenue and cash flow.

What Does the ROCE Trend For Metrofile Holdings Tell Us?

We are a bit worried about the trend of returns on capital at Metrofile Holdings. Unfortunately the returns on capital have diminished from the 19% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Metrofile Holdings becoming one if things continue as they have.

The Bottom Line

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Despite the concerning underlying trends, the stock has actually gained 34% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

If you'd like to know more about Metrofile Holdings, we've spotted 3 warning signs, and 2 of them can't be ignored.

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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.