If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. So, when we ran our eye over Mader Group's (ASX:MAD) trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Mader Group is:

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

0.33 = AU$29m ÷ (AU$140m - AU$51m) (Based on the trailing twelve months to December 2021).

Therefore, Mader Group has an ROCE of 33%. That's a fantastic return and not only that, it outpaces the average of 6.0% earned by companies in a similar industry.

Check out our latest analysis for Mader Group  roce

In the above chart we have measured Mader Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Mader Group here  for free.

What Does the ROCE Trend For Mader Group Tell Us?

Mader Group deserves to be commended in regards to it's returns. The company has consistently earned 33% for the last five years, and the capital employed within the business has risen 896% in that time. Now considering ROCE is an attractive 33%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.



The Bottom Line On Mader Group's ROCE

In summary, we're delighted to see that Mader Group has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And long term investors would be thrilled with the 195% return they've received over the last year. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

Mader Group does come with some risks though, we found 2 warning signs in our investment analysis,and 1 of those doesn't sit too well with us...

Mader Group is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.