Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we’ll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. With that in mind, the ROCE of MARR (BIT:MARR) looks decent, right now, so lets see what the trend of returns can tell us.
Understanding Return On Capital Employed (ROCE)
For those who don’t know, ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on MARR is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.16 = €97m ÷ (€1.0b – €408m) (Based on the trailing twelve months to March 2020).
Thus, MARR has an ROCE of 16%. On its own, that’s a standard return, however it’s much better than the 9.2% generated by the Consumer Retailing industry.
In the above chart we have a measured MARR’s prior ROCE against its prior performance, but the future is arguably more important. If you’d like, you can check out the forecasts from the analysts covering MARR here for free.
What The Trend Of ROCE Can Tell Us
While the current returns on capital are decent, they haven’t changed much. The company has consistently earned 16% for the last five years, and the capital employed within the business has risen 30% in that time. 16% is a pretty standard return, and it provides some comfort knowing that MARR has consistently earned this amount. 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.
On a side note, MARR’s current liabilities are still rather high at 41% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it’s not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Key Takeaway
The main thing to remember is that MARR has proven its ability to continually reinvest at respectable rates of return. Yet over the last five years the stock has declined 1.6%, so the decline might provide an opening. For that reason, savvy investors might want to look further into this company in case it’s a prime investment.
If you want to continue researching MARR, you might be interested to know about the 1 warning sign that our analysis has discovered.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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This article by Simply Wall St is general in nature. 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.
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