There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Speaking of which, we noticed some great changes in MAX Automation's (ETR:MXHN) returns on capital, so let's have a look.
Understanding 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 MAX Automation, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = €22m ÷ (€364m - €145m) (Based on the trailing twelve months to September 2022).
So, MAX Automation has an ROCE of 10%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Machinery industry average of 9.1%.
View our latest analysis for MAX Automation
In the above chart we have measured MAX Automation's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for MAX Automation.
What Can We Tell From MAX Automation's ROCE Trend?
MAX Automation is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 68% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.
The Key Takeaway
In summary, we're delighted to see that MAX Automation has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Given the stock has declined 44% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for MAX Automation (of which 1 doesn't sit too well with us!) that you should know about.