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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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Macquarie Technology Group (ASX:MAQ) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Macquarie Technology Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.084 = AU$51m ÷ (AU$690m - AU$85m) (Based on the trailing twelve months to June 2024).
Therefore, Macquarie Technology Group has an ROCE of 8.4%. Even though it's in line with the industry average of 7.9%, it's still a low return by itself.
View our latest analysis for Macquarie Technology Group
Above you can see how the current ROCE for Macquarie Technology Group 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 Macquarie Technology Group for free.
The Trend Of ROCE
The trend of ROCE doesn't look fantastic because it's fallen from 20% five years ago, while the business's capital employed increased by 411%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Macquarie Technology Group's earnings and if they change as a result from the capital raise.
On a related note, Macquarie Technology Group has decreased its current liabilities to 12% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.