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Will Mastermyne Group's (ASX:MYE) Growth In ROCE Persist?

Simply Wall St
·3 min read

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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 Mastermyne Group (ASX:MYE) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What is it?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Mastermyne Group, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.20 = AU$17m ÷ (AU$138m - AU$51m) (Based on the trailing twelve months to June 2020).

Therefore, Mastermyne Group has an ROCE of 20%. In absolute terms, that's a satisfactory return, but compared to the Metals and Mining industry average of 9.3% it's much better.

Check out our latest analysis for Mastermyne Group

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roce

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 Mastermyne Group's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Mastermyne Group's ROCE Trending?

We're delighted to see that Mastermyne Group is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 20% on its capital. In addition to that, Mastermyne Group is employing 22% 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.

The Key Takeaway

In summary, it's great to see that Mastermyne Group has managed to break into profitability and is continuing to reinvest in its business. Since the stock has returned a staggering 222% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing, we've spotted 4 warning signs facing Mastermyne Group that you might find interesting.

While Mastermyne Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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