There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Murray Cod Australia (ASX:MCA) looks quite promising in regards to its trends of return on capital.

What is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Murray Cod Australia:

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

0.04 = AU$1.5m ÷ (AU$39m - AU$1.9m) (Based on the trailing twelve months to December 2020).

So, Murray Cod Australia has an ROCE of 4.0%. In absolute terms, that's a low return and it also under-performs the Food industry average of 6.2%.

Check out our latest analysis for Murray Cod Australia

Above you can see how the current ROCE for Murray Cod Australia 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 Murray Cod Australia here for free.

The Trend Of ROCE

We're delighted to see that Murray Cod Australia is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making four years ago but is is now generating 4.0% on its capital. Not only that, but the company is utilizing 660% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 4.8%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Murray Cod Australia has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

What We Can Learn From Murray Cod Australia's ROCE

Long story short, we're delighted to see that Murray Cod Australia's reinvestment activities have paid off and the company is now profitable. And with the stock having performed exceptionally well over the last three years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you'd like to know more about Murray Cod Australia, we've spotted 3 warning signs, and 1 of them is concerning.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

This article by Simply Wall St is general in nature. 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.

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