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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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 Manz (ETR:M5Z) and its trend of ROCE, we really liked what we saw.
What Is 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. The formula for this calculation on Manz is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.044 = €6.0m ÷ (€304m - €170m) (Based on the trailing twelve months to September 2023).
Thus, Manz has an ROCE of 4.4%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 17%.
View our latest analysis for Manz
Above you can see how the current ROCE for Manz 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 Manz for free.
So How Is Manz's ROCE Trending?
Like most people, we're pleased that Manz is now generating some pretax earnings. The company was generating losses five years ago, but now it's turned around, earning 4.4% which is no doubt a relief for some early shareholders. Additionally, the business is utilizing 24% 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. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.
On a separate but related note, it's important to know that Manz has a current liabilities to total assets ratio of 56%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Bottom Line
In summary, it's great to see that Manz has been able to turn things around and earn higher returns on lower amounts of capital. And since the stock has dived 72% over the last five years, there may be other factors affecting the company's prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.