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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. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So, when we ran our eye over M.T.I Wireless Edge's (LON:MWE) trend of ROCE, we liked what we saw.
What Is Return On Capital Employed (ROCE)?
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. To calculate this metric for M.T.I Wireless Edge, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = US$4.6m ÷ (US$42m - US$12m) (Based on the trailing twelve months to June 2024).
Thus, M.T.I Wireless Edge has an ROCE of 15%. By itself that's a normal return on capital and it's in line with the industry's average returns of 15%.
See our latest analysis for M.T.I Wireless Edge
Above you can see how the current ROCE for M.T.I Wireless Edge 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 analyst report for M.T.I Wireless Edge .
How Are Returns Trending?
The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has consistently earned 15% for the last five years, and the capital employed within the business has risen 33% in that time. 15% is a pretty standard return, and it provides some comfort knowing that M.T.I Wireless Edge has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
In Conclusion...
To sum it up, M.T.I Wireless Edge has simply been reinvesting capital steadily, at those decent rates of return. And since the stock has risen strongly over the last five years, it appears the market might expect this trend to continue. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.
M.T.I Wireless Edge does have some risks though, and we've spotted 2 warning signs for M.T.I Wireless Edge that you might be interested in.