To find multi-bagger stock, what are the underlying trends we need to look for in a business? First, we would like to identify a growth to return to on capital employed (ROCE) and at the same time, a based capital employed. Ultimately, this demonstrates that this is a company that is reinvesting its profits at increasing rates of return. So when we looked through our eyes Computer matrix (TLV: MTRX) trend of the ROCE, we really liked what we saw.
Understanding Return on Capital Employed (ROCE)
For those who don’t know, ROCE is a measure of a company’s annual pre-tax profit (its return), relative to the capital employed in the company. The formula for this calculation on Matrix IT is:
Return on capital employed = Profit before interest and taxes (EBIT) Ã· (Total assets – Current liabilities)
0.21 = âª 321m Ã· (âª 3.3b – âª 1.8b) (Based on the last twelve months up to September 2021).
Therefore, Matrix IT has a ROCE of 21%. This in itself is a very good return and it is comparable to the returns obtained by companies in a similar industry.
Check out our latest analysis for Matrix IT
Although the past is not representative of the future, it can be useful to know the historical performance of a company, which is why we have this graph above. If you want to delve deeper into the history of Matrix IT, check out this free graph of past income, income and cash flow.
What the ROCE trend can tell us
It’s hard not to be impressed with Matrix IT’s returns on capital. Over the past five years, ROCE has remained relatively stable at around 21% and the company has deployed 72% additional capital in its operations. Now that the ROCE is attractive at 21%, this combination is actually quite attractive because it means that the company can constantly put money in to work and generate those high returns. If these trends can continue, it wouldn’t surprise us if the company were to become a multi-bagger.
On a separate but related note, it’s important to know that Matrix IT has a current liabilities to total assets ratio of 54%, which we consider to be quite high. What this actually means is that suppliers (or short-term creditors) fund a large portion of the business, so just be aware that this can introduce some elements of risk. While this isn’t necessarily a bad thing, it can be beneficial if this ratio is lower.
What we can learn from Matrix IT’s ROCE
In short, we would say that Matrix IT has the makings of a multi-bagger since it has been able to compose its capital at very profitable rates of return. And the stock has performed incredibly well with a 270% return over the past five years, so long-term investors are no doubt delighted with the result. So while the positive underlying trends can be explained by investors, we still believe this stock is worth looking into.
Like most businesses, Matrix IT comes with certain risks, and we have found 2 warning signs that you need to be aware of.
High yields are a key ingredient to strong performance, so check out our free list of stocks generating high returns on equity with strong balance sheets.
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