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Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. So on that note, Mimecast (NASDAQ:MIME) looks quite promising in regards to its trends of return on capital.
Understanding 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. The formula for this calculation on Mimecast is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.06 = US$35m ÷ (US$935m - US$346m) (Based on the trailing twelve months to March 2021).
Therefore, Mimecast has an ROCE of 6.0%. In absolute terms, that's a low return and it also under-performs the Software industry average of 11%.
Above you can see how the current ROCE for Mimecast compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
How Are Returns Trending?
Mimecast 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 6.0% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Mimecast is utilizing 545% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
One more thing to note, Mimecast has decreased current liabilities to 37% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Mimecast has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.
The Key Takeaway
In summary, it's great to see that Mimecast has managed to break into profitability and is continuing to reinvest in its business. Since the stock has returned a staggering 445% 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.
On a separate note, we've found 3 warning signs for Mimecast you'll probably want to know about.
While Mimecast 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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