If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. That's why when we briefly looked at MoneyMax Financial Services' (Catalist:5WJ) ROCE trend, we were pretty happy with what we saw.
What Is 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. To calculate this metric for MoneyMax Financial Services, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = S$45m ÷ (S$629m - S$353m) (Based on the trailing twelve months to December 2022).
So, MoneyMax Financial Services has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Specialty Retail industry average of 8.3% it's much better.
Check out our latest analysis for MoneyMax Financial Services
Historical performance is a great place to start when researching a stock so above you can see the gauge for MoneyMax Financial Services' ROCE against it's prior returns. If you'd like to look at how MoneyMax Financial Services has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Can We Tell From MoneyMax Financial Services' ROCE Trend?
While the current returns on capital are decent, they haven't changed much. Over the past five years, ROCE has remained relatively flat at around 16% and the business has deployed 267% more capital into its operations. Since 16% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
On a side note, MoneyMax Financial Services has done well to reduce current liabilities to 56% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk. Although because current liabilities are still 56%, some of that risk is still prevalent.
The Bottom Line
To sum it up, MoneyMax Financial Services has simply been reinvesting capital steadily, at those decent rates of return. And the stock has followed suit returning a meaningful 85% to shareholders over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.