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What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at the ROCE trend of Morefield Group (AMS:MORE) we really liked what we saw.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Morefield Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.31 = €11m ÷ (€64m - €29m) (Based on the trailing twelve months to June 2024).
Therefore, Morefield Group has an ROCE of 31%. That's a fantastic return and not only that, it outpaces the average of 17% earned by companies in a similar industry.
Check out our latest analysis for Morefield Group
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're interested in investigating Morefield Group's past further, check out this free graph covering Morefield Group's past earnings, revenue and cash flow.
The Trend Of ROCE
The fact that Morefield Group is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses four years ago, but now it's earning 31% which is a sight for sore eyes. In addition to that, Morefield Group is employing 145,062% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
On a side note, Morefield Group's current liabilities are still rather high at 46% of total assets. 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.
What We Can Learn From Morefield Group's ROCE
Long story short, we're delighted to see that Morefield Group's reinvestment activities have paid off and the company is now profitable. Since the stock has returned a solid 81% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Morefield Group can keep these trends up, it could have a bright future ahead.