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What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. With that in mind, we've noticed some promising trends at Mastermyne Group (ASX:MYE) so let's look a bit deeper.
Return On Capital Employed (ROCE): What is it?
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 Mastermyne Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = AU$14m ÷ (AU$127m - AU$42m) (Based on the trailing twelve months to December 2020).
Thus, Mastermyne Group has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 8.9% generated by the Metals and Mining industry.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Mastermyne Group's ROCE against it's prior returns. If you're interested in investigating Mastermyne Group's past further, check out this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
Mastermyne Group is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 16%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 24%. So we're very much inspired by what we're seeing at Mastermyne Group thanks to its ability to profitably reinvest capital.
Our Take On Mastermyne Group's ROCE
In summary, it's great to see that Mastermyne Group can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a staggering 700% to shareholders over the last five years, it looks like investors are recognizing these changes. 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 Mastermyne Group you'll probably want to know about.
While Mastermyne Group 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.
This article by Simply Wall St is general in nature. 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.
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