Returns On Capital At M+S Hydraulic AD (BUL:5MH) Paint An Interesting Picture

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating M+S Hydraulic AD (BUL:5MH), we don't think it's current trends fit the mold of a multi-bagger.

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 M+S Hydraulic AD is:

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

0.18 = лв13m ÷ (лв97m - лв25m) (Based on the trailing twelve months to June 2020).

Thus, M+S Hydraulic AD has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 9.0% generated by the Machinery industry.

Check out our latest analysis for M+S Hydraulic AD

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how M+S Hydraulic AD 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 M+S Hydraulic AD's ROCE Trend?

Things have been pretty stable at M+S Hydraulic AD, with its capital employed and returns on that capital staying somewhat the same for the last five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So unless we see a substantial change at M+S Hydraulic AD in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

What We Can Learn From M+S Hydraulic AD's ROCE

In a nutshell, M+S Hydraulic AD has been trudging along with the same returns from the same amount of capital over the last five years. Since the stock has gained an impressive 52% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

While M+S Hydraulic AD 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.

While M+S Hydraulic AD isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. 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.
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