Market Herald (ASX:TMH) Will Want To Turn Around Its Return Trends

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after briefly looking over the numbers, we don't think Market Herald (ASX:TMH) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for Market Herald, this is the formula:

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

0.011 = AU$688k ÷ (AU$169m - AU$105m) (Based on the trailing twelve months to December 2022).

Therefore, Market Herald has an ROCE of 1.1%. In absolute terms, that's a low return and it also under-performs the Interactive Media and Services industry average of 8.8%.

See our latest analysis for Market Herald

Historical performance is a great place to start when researching a stock so above you can see the gauge for Market Herald's ROCE against it's prior returns. If you'd like to look at how Market Herald has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Market Herald's ROCE Trend?

When we looked at the ROCE trend at Market Herald, we didn't gain much confidence. Around five years ago the returns on capital were 40%, but since then they've fallen to 1.1%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Market Herald's current liabilities have increased over the last five years to 62% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

Our Take On Market Herald's ROCE

While returns have fallen for Market Herald in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has followed suit returning a meaningful 66% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

If you'd like to know more about Market Herald, we've spotted 3 warning signs, and 2 of them can't be ignored.

While Market Herald 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.