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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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 when we looked at Masterflex (ETR:MZX) and its trend of ROCE, we really liked what we saw.
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 Masterflex, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = €13m ÷ (€98m - €10m) (Based on the trailing twelve months to September 2024).
Thus, Masterflex has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 8.9% it's much better.
View our latest analysis for Masterflex
In the above chart we have measured Masterflex's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Masterflex for free.
The Trend Of ROCE
Investors would be pleased with what's happening at Masterflex. Over the last five years, returns on capital employed have risen substantially to 15%. Basically the business is earning more per dollar of capital invested and in addition to that, 24% more capital is being employed now too. So we're very much inspired by what we're seeing at Masterflex thanks to its ability to profitably reinvest capital.
Our Take On Masterflex's ROCE
All in all, it's terrific to see that Masterflex is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 205% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation for MZX that compares the share price and estimated value.