There Are Reasons To Feel Uneasy About Mitek Systems' (NASDAQ:MITK) Returns On Capital
Did you know there are some financial metrics that can provide clues of a potential 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Mitek Systems (NASDAQ:MITK), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What is it?
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. To calculate this metric for Mitek Systems, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.07 = US$27m ÷ (US$422m - US$38m) (Based on the trailing twelve months to June 2021).
Therefore, Mitek Systems has an ROCE of 7.0%. Ultimately, that's a low return and it under-performs the Software industry average of 10%.
View our latest analysis for Mitek Systems
In the above chart we have measured Mitek Systems' 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 Mitek Systems here for free.
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at Mitek Systems doesn't inspire confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 7.0%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
What We Can Learn From Mitek Systems' ROCE
While returns have fallen for Mitek Systems in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And long term investors must be optimistic going forward because the stock has returned a huge 156% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.
One more thing, we've spotted 4 warning signs facing Mitek Systems that you might find interesting.
While Mitek Systems isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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.
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