Stock Analysis

Mader Group (ASX:MAD) Knows How To Allocate Capital

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ASX:MAD
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To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. With that in mind, the ROCE of Mader Group (ASX:MAD) looks attractive right now, so lets see what the trend of returns can tell us.

Return On Capital Employed (ROCE): What is it?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Mader Group:

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

0.39 = AU$26m ÷ (AU$107m - AU$40m) (Based on the trailing twelve months to December 2020).

Therefore, Mader Group has an ROCE of 39%. In absolute terms that's a great return and it's even better than the Commercial Services industry average of 9.8%.

See our latest analysis for Mader Group

roce
ASX:MAD Return on Capital Employed August 13th 2021

Above you can see how the current ROCE for Mader 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 report on analyst forecasts for the company.

What Does the ROCE Trend For Mader Group Tell Us?

We'd be pretty happy with returns on capital like Mader Group. Over the past three years, ROCE has remained relatively flat at around 39% and the business has deployed 218% more capital into its operations. Now considering ROCE is an attractive 39%, 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.

One more thing to note, even though ROCE has remained relatively flat over the last three years, the reduction in current liabilities to 38% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Key Takeaway

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. Therefore it's no surprise that shareholders have earned a respectable 25% return if they held over the last year. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

On a final note, we've found 2 warning signs for Mader Group that we think you should be aware of.

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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