Yahoo Finance We're Watching These Trends At MAXIMUS (NYSE:MMS)
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at MAXIMUS (NYSE:MMS) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Understanding Return On Capital Employed (ROCE)
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 MAXIMUS is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = US$281m ÷ (US$2.0b - US$438m) (Based on the trailing twelve months to March 2020).
Thus, MAXIMUS has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 9.9% generated by the IT industry.
See our latest analysis for MAXIMUS
Above you can see how the current ROCE for MAXIMUS compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering MAXIMUS here for free.
So How Is MAXIMUS' ROCE Trending?
In terms of MAXIMUS' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 18% from 34% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
What We Can Learn From MAXIMUS' ROCE
While returns have fallen for MAXIMUS in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. In light of this, the stock has only gained 30% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.
While MAXIMUS doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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