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What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Maxim Power (TSE:MXG) and its trend of ROCE, we really liked what we saw.
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 Maxim Power is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.073 = CA$31m ÷ (CA$446m - CA$24m) (Based on the trailing twelve months to September 2024).
So, Maxim Power has an ROCE of 7.3%. Even though it's in line with the industry average of 7.3%, it's still a low return by itself.
Check out our latest analysis for Maxim Power
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 Maxim Power.
What Does the ROCE Trend For Maxim Power Tell Us?
We're delighted to see that Maxim Power is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 7.3% on its capital. In addition to that, Maxim Power is employing 149% 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.
What We Can Learn From Maxim Power's ROCE
Overall, Maxim Power gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Since the stock has returned a staggering 219% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.
If you want to continue researching Maxim Power, you might be interested to know about the 4 warning signs that our analysis has discovered.