What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. Speaking of which, we noticed some great changes in Maxim Power's (TSE:MXG) returns on capital, so let's have a look.

Understanding 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. To calculate this metric for Maxim Power, this is the formula:

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

0.017 = CA$7.1m ÷ (CA$435m - CA$26m) (Based on the trailing twelve months to March 2024).

Thus, Maxim Power has an ROCE of 1.7%. Ultimately, that's a low return and it under-performs the Renewable Energy industry average of 4.6%.

View our latest analysis for Maxim Power

Historical performance is a great place to start when researching a stock so above you can see the gauge for Maxim Power's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Maxim Power.

What The Trend Of ROCE Can Tell Us

The fact that Maxim Power is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 1.7% on its capital. In addition to that, Maxim Power is employing 148% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

Our Take On Maxim Power's ROCE

In summary, it's great to see that Maxim Power has managed to break into profitability and is continuing to reinvest in its business. And with the stock having performed exceptionally well over the last five 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 want to continue researching Maxim Power, you might be interested to know about the 1 warning sign that our analysis has discovered.