Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. In light of that, when we looked at MLG Oz (ASX:MLG) and its ROCE trend, we weren't exactly thrilled.

Our free stock report includes 1 warning sign investors should be aware of before investing in MLG Oz. Read for free now.

Return On Capital Employed (ROCE): What Is It?

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 MLG Oz, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.086 = AU$18m ÷ (AU$301m - AU$97m) (Based on the trailing twelve months to December 2024).

So, MLG Oz has an ROCE of 8.6%. On its own, that's a low figure but it's around the 8.3% average generated by the Metals and Mining industry.

Check out our latest analysis for MLG Oz

Above you can see how the current ROCE for MLG Oz 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 MLG Oz for free.

The Trend Of ROCE

In terms of MLG Oz's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 22% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, MLG Oz has decreased its current liabilities to 32% of total assets. So we could link some of this to the decrease in ROCE. 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.

Our Take On MLG Oz's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that MLG Oz is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 0.8% over the last three years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.