To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. If you see this, it typically means it’s a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Market (ASX:MKT), it didn’t seem to tick all of these boxes.
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. To calculate this metric for Market, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.0029 = AU$250k ÷ (AU$148m – AU$62m) (Based on the trailing twelve months to June 2024).
Thus, Market has an ROCE of 0.3%. In absolute terms, that’s a low return and it also under-performs the Interactive Media and Services industry average of 9.3%.
See our latest analysis for Market
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 Market’s past further, check out this free graph covering Market’s past earnings, revenue and cash flow.
On the surface, the trend of ROCE at Market doesn’t inspire confidence. To be more specific, ROCE has fallen from 0.4% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
On a separate but related note, it’s important to know that Market has a current liabilities to total assets ratio of 42%, which we’d consider pretty high. 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.
While returns have fallen for Market in recent times, we’re encouraged to see that sales are growing and that the business is reinvesting in its operations. These trends are starting to be recognized by investors since the stock has delivered a 0.05% gain to shareholders who’ve held over the last five years. Therefore we’d recommend looking further into this stock to confirm if it has the makings of a good investment.
Read More: Market (ASX:MKT) Might Be Having Difficulty Using Its Capital Effectively
