We Think Metrofile Holdings (JSE:MFL) Might Have The DNA Of A Multi-Bagger

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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 Metrofile Holdings' (JSE:MFL) returns on capital, so let's have a look.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for Metrofile Holdings, this is the formula:

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

0.35 = R255m ÷ (R1.6b - R855m) (Based on the trailing twelve months to June 2023).

So, Metrofile Holdings has an ROCE of 35%. While that is an outstanding return, the rest of the IT industry generates similar returns, on average.

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 want to delve into the historical earnings, revenue and cash flow of Metrofile Holdings, check out these free graphs here.

What Can We Tell From Metrofile Holdings' ROCE Trend?

You'd find it hard not to be impressed with the ROCE trend at Metrofile Holdings. We found that the returns on capital employed over the last five years have risen by 94%. The company is now earning R0.4 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 43% less capital than it was five years ago. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 54% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Bottom Line

In the end, Metrofile Holdings has proven it's capital allocation skills are good with those higher returns from less amount of capital. And with a respectable 60% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a separate note, we've found 4 warning signs for Metrofile Holdings you'll probably want to know about.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.