In This Article:
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. So when we looked at Micro-Mechanics (Holdings) (SGX:5DD), they do have a high ROCE, but we weren't exactly elated from how returns are trending.
Return On Capital Employed (ROCE): What Is It?
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. To calculate this metric for Micro-Mechanics (Holdings), this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.24 = S$12m ÷ (S$59m - S$8.0m) (Based on the trailing twelve months to September 2024).
Thus, Micro-Mechanics (Holdings) has an ROCE of 24%. That's a fantastic return and not only that, it outpaces the average of 3.6% earned by companies in a similar industry.
See our latest analysis for Micro-Mechanics (Holdings)
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Micro-Mechanics (Holdings).
What Does the ROCE Trend For Micro-Mechanics (Holdings) Tell Us?
Over the past five years, Micro-Mechanics (Holdings)'s ROCE has remained relatively flat while the business is using 20% less capital than before. This indicates to us that assets are being sold and thus the business is likely shrinking, which you'll remember isn't the typical ingredients for an up-and-coming multi-bagger. But we have to give it to Micro-Mechanics (Holdings) because the returns on the capital it is employing are still high in relative terms.
What We Can Learn From Micro-Mechanics (Holdings)'s ROCE
Overall, we're not ecstatic to see Micro-Mechanics (Holdings) reducing the amount of capital it employs in the business. Unsurprisingly, the stock has only gained 7.0% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
If you want to know some of the risks facing Micro-Mechanics (Holdings) we've found 2 warning signs (1 is potentially serious!) that you should be aware of before investing here.