There are a few key trends to look for if we want to identify the next multi-bagger. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, the ROCE of Mips (STO:MIPS) looks great, so lets see what the trend can tell us.
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 Mips is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.49 = kr301m ÷ (kr782m – kr169m) (Based on the trailing twelve months to September 2022).
So, Mips has an ROCE of 49%. That’s a fantastic return and not only that, it outpaces the average of 20% earned by companies in a similar industry.
Our analysis indicates that MIPS is potentially undervalued!
Above you can see how the current ROCE for Mips compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’d like to see what analysts are forecasting going forward, you should check out our free report for Mips.
So How Is Mips’ ROCE Trending?
Mips is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 49%. The company is effectively making more money per dollar of capital used, and it’s worth noting that the amount of capital has increased too, by 192%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that’s why we’re impressed.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 22% of the business, which is more than it was five years ago. It’s worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.
The Bottom Line
All in all, it’s terrific to see that Mips is reaping the rewards from prior investments and is growing its capital base. And a remarkable 669% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
One more thing, we’ve spotted 1 warning sign facing Mips that you might find interesting.
Mips is not the only stock earning high returns. If you’d like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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Find out whether Mips is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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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.