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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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 MDA Space (TSE:MDA) so let's look a bit deeper.
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Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for MDA Space:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.072 = CA$108m ÷ (CA$2.6b - CA$1.1b) (Based on the trailing twelve months to December 2024).
Therefore, MDA Space has an ROCE of 7.2%. Ultimately, that's a low return and it under-performs the Aerospace & Defense industry average of 9.6%.
See our latest analysis for MDA Space
Above you can see how the current ROCE for MDA Space compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering MDA Space for free.
What Does the ROCE Trend For MDA Space Tell Us?
MDA Space has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses four years ago, but now it's earning 7.2% which is a sight for sore eyes. Not only that, but the company is utilizing 24% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 42% of the business, which is more than it was four years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.
The Bottom Line On MDA Space's ROCE
In summary, it's great to see that MDA Space has managed to break into profitability and is continuing to reinvest in its business. And with the stock having performed exceptionally well over the last three years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.