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There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. So on that note, MTQ (SGX:M05) looks quite promising in regards to its trends of return on capital.
Understanding Return On Capital Employed (ROCE)
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 MTQ, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.032 = S$2.5m ÷ (S$119m - S$41m) (Based on the trailing twelve months to September 2022).
Therefore, MTQ has an ROCE of 3.2%. In absolute terms, that's a low return and it also under-performs the Energy Services industry average of 4.0%.
See our latest analysis for MTQ
Historical performance is a great place to start when researching a stock so above you can see the gauge for MTQ's ROCE against it's prior returns. If you're interested in investigating MTQ's past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For MTQ Tell Us?
It's great to see that MTQ has started to generate some pre-tax earnings from prior investments. While the business is profitable now, it used to be incurring losses on invested capital five years ago. Additionally, the business is utilizing 26% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. This could potentially mean that the company is selling some of its assets.
Our Take On MTQ's ROCE
From what we've seen above, MTQ has managed to increase it's returns on capital all the while reducing it's capital base. Given the stock has declined 27% 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.
If you want to know some of the risks facing MTQ we've found 2 warning signs (1 can't be ignored!) that you should be aware of before investing here.
While MTQ may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.