There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. 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.
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 Monadelphous Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.09 = AU$44m ÷ (AU$816m - AU$326m) (Based on the trailing twelve months to December 2020).
Therefore, Monadelphous Group has an ROCE of 9.0%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 12%.
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'd like, you can check out the forecasts from the analysts covering Monadelphous Group here for free.
What Does the ROCE Trend For Monadelphous Group Tell Us?
On the surface, the trend of ROCE at Monadelphous Group doesn't inspire confidence. To be more specific, ROCE has fallen from 30% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.
To conclude, we've found that Monadelphous Group is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 87% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
If you want to continue researching Monadelphous Group, you might be interested to know about the 2 warning signs that our analysis has discovered.
While Monadelphous Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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