Stock Analysis

Many Would Be Envious Of Mader Group's (ASX:MAD) Excellent Returns On Capital

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ASX:MAD
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There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. That's why when we briefly looked at Mader Group's (ASX:MAD) ROCE trend, we were very happy with what we saw.

Understanding 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. Analysts use this formula to calculate it for Mader Group:

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

0.33 = AU$29m ÷ (AU$140m - AU$51m) (Based on the trailing twelve months to December 2021).

Thus, Mader Group has an ROCE of 33%. In absolute terms that's a great return and it's even better than the Commercial Services industry average of 6.0%.

See our latest analysis for Mader Group

roce
ASX:MAD Return on Capital Employed March 18th 2022

In the above chart we have measured Mader Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Mader Group here for free.

What Does the ROCE Trend For Mader Group Tell Us?

In terms of Mader Group's history of ROCE, it's quite impressive. The company has consistently earned 33% for the last five years, and the capital employed within the business has risen 896% in that time. Now considering ROCE is an attractive 33%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If Mader Group can keep this up, we'd be very optimistic about its future.

What We Can Learn From Mader Group's ROCE

In short, we'd argue Mader Group has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. And the stock has done incredibly well with a 218% return over the last year, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

One final note, you should learn about the 3 warning signs we've spotted with Mader Group (including 1 which is a bit unpleasant) .

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

Valuation is complex, but we're helping make it simple.

Find out whether Mader Group is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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