Returns gain momentum at MSL Solutions (ASX:MSL)

What trends should we look for if we want to identify stocks that can multiply in value over the long term? Among other things, we will want to see two things; first, growth come back on capital employed (ROCE) and on the other hand, an expansion of the amount 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. So when we looked MSL Solutions (ASX:MSL) and its ROCE trend, we really liked what we saw.

Return on capital employed (ROCE): what is it?

For those who don’t know what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital used in its business. The formula for this calculation on MSL Solutions is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)

0.043 = AU$1.4 million ÷ (AU$46 million – AU$12 million) (Based on the last twelve months to December 2021).

Thereby, MSL Solutions posted a ROCE of 4.3%. In absolute terms, that’s a low return, and it’s also below the software industry average of 11%.

Discover our latest analysis for MSL Solutions

ASX:MSL Return on capital employed June 16, 2022

Although the past is not indicative 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 investigate MSL Solutions’ past further, check out this free chart of past profits, revenue and cash flow.

What the ROCE trend can tell us

It’s great to see that MSL Solutions has started generating pre-tax profits from past investments. Although the company is now profitable, it suffered losses on the capital invested five years ago. Additionally, the company is using 34% less capital than five years ago, and taken at face value, this may mean the company needs less cash to work with to earn a return. MSL Solutions could sell underperforming assets as ROCE improves.

In conclusion…

In a nutshell, we are delighted to see that MSL Solutions was able to generate higher returns with less capital. Astute investors may have an opportunity here as the stock is down 57% over the past five years. That said, research into the company’s current valuation metrics and future prospects seems appropriate.

If you want to know the risks that MSL Solutions faces, we have discovered 4 warning signs of which you should be aware.

Although MSL Solutions does not currently generate the highest returns, we have compiled a list of companies that currently generate over 25% return on equity. look at this free list here.

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.

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