Yahoo Finance There's Been No Shortage Of Growth Recently For Megaport's (ASX:MP1) Returns On Capital
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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Megaport (ASX:MP1) so let's look a bit deeper.
Return On Capital Employed (ROCE): What Is It?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Megaport is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.024 = AU$3.9m ÷ (AU$215m - AU$51m) (Based on the trailing twelve months to December 2023).
Therefore, Megaport has an ROCE of 2.4%. Ultimately, that's a low return and it under-performs the IT industry average of 7.9%.
Check out our latest analysis for Megaport
Above you can see how the current ROCE for Megaport compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Megaport .
So How Is Megaport's ROCE Trending?
Megaport has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 2.4% which is a sight for sore eyes. In addition to that, Megaport is employing 146% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
What We Can Learn From Megaport's ROCE
In summary, it's great to see that Megaport has managed to break into profitability and is continuing to reinvest in its business. Since the stock has returned a staggering 249% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.
Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation for MP1 that compares the share price and estimated value.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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.
