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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. So when we looked at Materialise (NASDAQ:MTLS) and its trend of ROCE, we really liked what we saw.
Understanding 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. To calculate this metric for Materialise, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.066 = €19m ÷ (€395m - €108m) (Based on the trailing twelve months to September 2024).
So, Materialise has an ROCE of 6.6%. In absolute terms, that's a low return and it also under-performs the Software industry average of 8.7%.
Check out our latest analysis for Materialise
In the above chart we have measured Materialise's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Materialise for free.
What Does the ROCE Trend For Materialise Tell Us?
Materialise is showing promise given that its ROCE is trending up and to the right. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 259% over the last five years. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
The Bottom Line On Materialise's ROCE
In summary, we're delighted to see that Materialise has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Given the stock has declined 59% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.
If you'd like to know about the risks facing Materialise, we've discovered 1 warning sign that you should be aware of.