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If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, the ROCE of Metcash (ASX:MTS) looks decent, right now, so lets see what the trend of returns can tell us.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Metcash is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = AU$458m ÷ (AU$5.8b - AU$2.9b) (Based on the trailing twelve months to April 2024).
Thus, Metcash has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 11% generated by the Consumer Retailing industry.
See our latest analysis for Metcash
In the above chart we have measured Metcash's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Metcash .
How Are Returns Trending?
While the returns on capital are good, they haven't moved much. The company has employed 87% more capital in the last five years, and the returns on that capital have remained stable at 16%. Since 16% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
On a separate but related note, it's important to know that Metcash has a current liabilities to total assets ratio of 50%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
Our Take On Metcash's ROCE
The main thing to remember is that Metcash has proven its ability to continually reinvest at respectable rates of return. And the stock has followed suit returning a meaningful 63% to shareholders over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.