Midway (ASX:MWY) Will Be Hoping To Turn Its Returns On Capital Around

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. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Midway (ASX:MWY) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Midway is:

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

0.034 = AU$7.5m ÷ (AU$262m - AU$42m) (Based on the trailing twelve months to December 2020).

So, Midway has an ROCE of 3.4%. In absolute terms, that's a low return and it also under-performs the Forestry industry average of 7.2%.

View our latest analysis for Midway

Above you can see how the current ROCE for Midway compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Midway.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Midway doesn't inspire confidence. Over the last five years, returns on capital have decreased to 3.4% from 12% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On Midway's ROCE

To conclude, we've found that Midway is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 58% in the last three years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One more thing, we've spotted 1 warning sign facing Midway that you might find interesting.

While Midway 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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