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. 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. Although, when we looked at Myer Holdings (ASX:MYR), it didn't seem to tick all of these boxes.
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. The formula for this calculation on Myer Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.037 = AU$70m ÷ (AU$2.6b - AU$677m) (Based on the trailing twelve months to January 2021).
Thus, Myer Holdings has an ROCE of 3.7%. In absolute terms, that's a low return and it also under-performs the Multiline Retail industry average of 6.2%.
In the above chart we have measured Myer Holdings' 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 Myer Holdings here for free.
What Can We Tell From Myer Holdings' ROCE Trend?
When we looked at the ROCE trend at Myer Holdings, we didn't gain much confidence. To be more specific, ROCE has fallen from 9.2% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
The Bottom Line
From the above analysis, we find it rather worrisome that returns on capital and sales for Myer Holdings have fallen, meanwhile the business is employing more capital than it was five years ago. Investors haven't taken kindly to these developments, since the stock has declined 69% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
While Myer Holdings doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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