Yahoo Finance The Returns At MaxiPARTS (ASX:MXI) Aren't Growing
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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at MaxiPARTS (ASX:MXI), it didn't seem to tick all of these boxes.
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 MaxiPARTS is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.079 = AU$8.6m ÷ (AU$146m - AU$36m) (Based on the trailing twelve months to June 2022).
Thus, MaxiPARTS has an ROCE of 7.9%. Ultimately, that's a low return and it under-performs the Machinery industry average of 12%.
See our latest analysis for MaxiPARTS
In the above chart we have measured MaxiPARTS' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for MaxiPARTS.
How Are Returns Trending?
We've noticed that although returns on capital are flat over the last five years, the amount of capital employed in the business has fallen 38% in that same period. This indicates to us that assets are being sold and thus the business is likely shrinking, which you'll remember isn't the typical ingredients for an up-and-coming multi-bagger. In addition to that, since the ROCE doesn't scream "quality" at 7.9%, it's hard to get excited about these developments.
The Bottom Line
It's a shame to see that MaxiPARTS is effectively shrinking in terms of its capital base. And in the last five years, the stock has given away 32% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
If you'd like to know more about MaxiPARTS, we've spotted 4 warning signs, and 1 of them makes us a bit uncomfortable.
While MaxiPARTS 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.
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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.
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