Here's What To Make Of Monadelphous Group's (ASX:MND) Decelerating Rates Of Return

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Monadelphous Group (ASX:MND) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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What Is 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 Monadelphous Group is:

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

0.17 = AU$96m ÷ (AU$877m - AU$324m) (Based on the trailing twelve months to December 2024).

Therefore, Monadelphous Group has an ROCE of 17%. That's a pretty standard return and it's in line with the industry average of 17%.

View our latest analysis for Monadelphous Group

Above you can see how the current ROCE for Monadelphous Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Monadelphous Group .

What Does the ROCE Trend For Monadelphous Group Tell Us?

There hasn't been much to report for Monadelphous Group's returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if Monadelphous Group doesn't end up being a multi-bagger in a few years time. That probably explains why Monadelphous Group has been paying out 88% of its earnings as dividends to shareholders. If the company is in fact lacking growth opportunities, that's one of the viable alternatives for the money.

Our Take On Monadelphous Group's ROCE

In summary, Monadelphous Group isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Yet to long term shareholders the stock has gifted them an incredible 133% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Like most companies, Monadelphous Group does come with some risks, and we've found 1 warning sign that you should be aware of.

While Monadelphous Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.