What early trends should we look for to identify a stock that could multiply in value over the long term? We want to see two things, among other things; primarily a growing one yield on invested capital (ROCE) and secondly on an expansion of the company quantity of the invested capital. Ultimately, this shows that it is a company that reinvests profits at increasingly higher returns. And in light of that, the trends we see Human and machine software (ETR:MUM) look promising, so let’s take a look.
For those unsure of what ROCE is, it measures the amount of pre-tax profit a company can generate from the capital used in its business. The formula for this calculation on Mensch und Maschine Software is:
Return on Capital Employed = Earnings Before Interest and Taxes (EBIT) ÷ (Total Assets – Current Liabilities)
0.41 = €51 million ÷ (€223 million – €99 million) (Based on the last twelve months to September 2024).
So, Human and machine software has a ROCE of 41%. That’s a fantastic return, and not only that: it beats the average of 12% that companies in a similar sector earn.
Check out our latest analysis for human and machine software
Above you can see how the current ROCE for Mensch und Maschine Software compares to past returns on capital, but there’s only so much you can tell from the past. If you are interested, you can check out the analysts’ forecasts in our free analyst report for human and machine software.
Mensch und Maschine Software shows some positive trends. The data shows that returns on capital have increased significantly over the past five years to 41%. In fact, the company is earning more per dollar invested, and is now using 30% more capital. So we’re very inspired by what we’re seeing at Mensch und Maschine Software thanks to its ability to reinvest capital profitably.
As a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in short-term debt. Short-term debt has risen to 45% of total assets, meaning the company is now increasingly financed by suppliers or short-term creditors, for example. Given the relatively high ratio, we would like to remind investors that having short-term debt at this level can pose certain risks at certain companies.
A company that grows its return on capital and can consistently reinvest in itself is a highly desirable trait, and that’s what Mensch und Maschine Software has. Investors may not yet be impressed by the favorable underlying trends, as the stock has returned just 34% to shareholders over the past five years. Therefore, we would investigate this stock further, in case it has more characteristics that could allow it to multiply in the long term.
On the other side of ROCE, we have to take valuation into account. That’s why we have one FREE intrinsic value estimate for MUM on our platform that’s definitely worth checking out.
If you want to see other companies achieving high returns, check out our free list of companies earning high returns with solid balance sheets here.
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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. We aim to provide you with targeted, long-term analysis based on fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Simply Wall St has no positions in the stocks mentioned.
