What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. That’s why when we briefly looked at MoneyMax Financial Services’ (Catalist:5WJ) ROCE trend, we were pretty happy with 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. The formula for this calculation on MoneyMax Financial Services is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.16 = S$46m ÷ (S$666m – S$385m) (Based on the trailing twelve months to June 2023).
Therefore, MoneyMax Financial Services has an ROCE of 16%. On its own, that’s a standard return, however it’s much better than the 12% generated by the Specialty Retail industry.
Check out our latest analysis for MoneyMax Financial Services
Historical performance is a great place to start when researching a stock so above you can see the gauge for MoneyMax Financial Services’ ROCE against it’s prior returns. If you’d like to look at how MoneyMax Financial Services has performed in the past in other metrics, you can view this free graph of MoneyMax Financial Services’ past earnings, revenue and cash flow.
How Are Returns Trending?
While the returns on capital are good, they haven’t moved much. Over the past five years, ROCE has remained relatively flat at around 16% and the business has deployed 269% more capital into its operations. Since 16% is a moderate ROCE though, it’s good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 58% of total assets, is good to see from a business owner’s perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously. We’d like to see this trend continue though because as it stands today, thats still a pretty high level.
What We Can Learn From MoneyMax Financial Services’ ROCE
To sum it up, MoneyMax Financial Services has simply been reinvesting capital steadily, at those decent rates of return. On top of that, the stock has rewarded shareholders with a remarkable 149% return to those who’ve held over the last five years. So even though the stock might be more “expensive” than it was before, we think the strong fundamentals warrant this stock for further research.
MoneyMax Financial Services does have some risks, we noticed 5 warning signs (and 2 which shouldn’t be ignored) we think you should know about.
While MoneyMax Financial Services isn’t earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
