To find a multi-bagger stock, what underlying trends should we look for in a company? First, we’ll want to see proof come back on capital employed (ROCE) which is increasing, and on the other hand, a base capital employed. This shows us that it is a compounding machine, capable of continuously reinvesting its profits back into the business and generating higher returns. With this in mind, we have noticed some promising trends in PM materials (NYSE:MP) so let’s look a little deeper.
Understanding return on capital employed (ROCE)
For those unaware, ROCE is a measure of a company’s annual pre-tax profit (yield), relative to the capital employed in the business. To calculate this metric for MP Materials, here is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.14 = $275 million ÷ ($2.0 billion – $52 million) (Based on the last twelve months to March 2022).
Therefore, MP Materials has a ROCE of 14%. In absolute terms, this is a fairly standard return, but compared to the metals and mining industry average, it lags behind.
Check out our latest analysis for MP Materials
Above, you can see how MP Materials’ current ROCE compares to its past returns on capital, but you can’t tell much about the past. If you want to see what analysts are predicting for the future, you should check out our free report for MP Materials.
So, what is the ROCE trend of MP Materials?
We are delighted to see that MP Materials is reaping the rewards of its investments and is now generating pre-tax profits. The company was generating losses three years ago, but is now earning 14%, which is a feast for the eyes. Not only that, but the company is using 2,568% more capital than before, but that’s to be expected of a company trying to become profitable. This may indicate that there are many opportunities to invest capital internally and at ever higher rates, two common characteristics of a multi-bagger.
On a related note, the company’s ratio of current liabilities to total assets has decreased to 2.6%, essentially reducing its funding from short-term creditors or vendors. Shareholders would therefore be pleased if the growth in returns came primarily from underlying business performance.
Much to the delight of most shareholders, MP Materials is now profitable. Given that the stock is down 16% in the last year, it could be a good investment if the valuation and other metrics are also attractive. With that in mind, we believe the promising trends warrant further investigation of this stock.
MP Materials does however have some risks, we have found 3 warning signs in our investment analysis, and 1 of them is potentially serious…
For those who like to invest in solid companies, look at this free list of companies with strong balance sheets and high returns on equity.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.