This article is intended for those of you who are at the beginning of your investing journey and want to begin learning the link between MDU Resources Group Inc (NYSE:MDU)’s return fundamentals and stock market performance.
If you purchase a MDU share you are effectively becoming a partner with many other shareholders. Your equity share is granted in return for the capital provided to the business to operate, and in order for an investment to be successful the business has to create earnings from the funds that make up this capital. You need to pay attention to this because your return on investment is linked to dividends and internal investments to improve the business, which can only occur if the company is expected to produce adequate earnings with the capital that has been provided. Therefore, looking at how efficiently MDU Resources Group is able to use capital to create earnings will help us understand your potential return. Investors use many different metrics but the analysis below focuses on return on capital employed (ROCE). Let’s take a look at what it can tell us.
Calculating Return On Capital Employed for MDU
When you choose to invest in a company, there is an opportunity cost because that money could’ve been invested elsewhere. The cost of missing out on another opportunity comes in the form of the potential long term gain you could’ve received, which is dependent on the gap between the return on capital you could’ve achieved and that of the company you invested in. Hence, capital returns are very important, and should be examined before you invest in conjunction with a certain benchmark that represents the minimum return you require to be compensated for the risk of missing out on other potentially lucrative investments. To determine MDU Resources Group’s capital return we will use ROCE, which tells us how much the company makes from the capital employed in their operations (for things like machinery, wages etc). MDU’s ROCE is calculated below:
ROCE Calculation for MDU
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = US$332m ÷ (US$6.7b – US$725m) = 6.9%
As you can see, MDU earned $6.9 from every $100 you invested over the previous twelve months. A good ROCE hurdle you should aim for in your investments is 15%, which MDU has failed to reach, meaning the company creates an unimpressive amount of earnings from capital employed.
Then why have investors invested?
MDU doesn’t return an attractive amount on capital, but this will only continue if the company is unable to increase earnings or decrease current capital requirements. So it is important for investors to understand what is going on under the hood and look at how these variables have been behaving. Three years ago, MDU’s ROCE was 5.5%, which means the company’s capital returns have improved. We can see that earnings have increased from US$249m to US$332m whilst capital employed has deteriorated because of a fall in total assets , which means that ROCE has increased as a result of MDU Resources Group’s ability to grow earnings in conjunction with increased capital efficiency.
Although MDU Resources Group’s ROCE is currently below the acceptable benchmark, the company has triggered an upward trend over the recent past which could signal an opportunity for a solid return on investment in the long term. Before making any decisions, ROCE does not tell the whole picture so you need to pay attention to other fundamentals like the management team to determine if an opportunity exists that isn’t made apparent by looking at past data. If you’re interested in diving deeper, take a look at what I’ve linked below for further information on these fundamentals and other potential investment opportunities.
- Management:Have insiders been ramping up their shares to take advantage of the market’s sentiment for MDU Resources Group’s future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.