Yahoo Finance Returns On Capital Are Showing Encouraging Signs At MP Materials (NYSE:MP)
If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at MP Materials (NYSE:MP) so let's look a bit deeper.
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 MP Materials, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = US$275m ÷ (US$2.0b - US$52m) (Based on the trailing twelve months to March 2022).
Therefore, MP Materials has an ROCE of 14%. In isolation, that's a pretty standard return but against the Metals and Mining industry average of 20%, it's not as good.
Check out our latest analysis for MP Materials
Above you can see how the current ROCE for MP Materials compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What The Trend Of ROCE Can Tell Us
We're delighted to see that MP Materials is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses three years ago, but now it's earning 14% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, MP Materials is utilizing 2,568% more capital than it was three years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
On a related note, the company's ratio of current liabilities to total assets has decreased to 2.6%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that MP Materials has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.
What We Can Learn From MP Materials' ROCE
To the delight of most shareholders, MP Materials has now broken into profitability. Since the total return from the stock has been almost flat over the last year, there might be an opportunity here if the valuation looks good. With that in mind, we believe the promising trends warrant this stock for further investigation.
One final note, you should learn about the 3 warning signs we've spotted with MP Materials (including 1 which makes us a bit uncomfortable) .
While MP Materials isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.
