Here's What To Make Of M+S Hydraulic AD's (BUL:MSH) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So, when we ran our eye over M+S Hydraulic AD's (BUL:MSH) trend of ROCE, we liked what we saw.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for M+S Hydraulic AD, this is the formula:

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

0.17 = лв13m ÷ (лв92m - лв16m) (Based on the trailing twelve months to September 2020).

Therefore, M+S Hydraulic AD has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 8.4% it's much better.

View our latest analysis for M+S Hydraulic AD

Historical performance is a great place to start when researching a stock so above you can see the gauge for M+S Hydraulic AD's ROCE against it's prior returns. 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 Does the ROCE Trend For M+S Hydraulic AD Tell Us?

While the current returns on capital are decent, they haven't changed much. The company has employed 20% more capital in the last five years, and the returns on that capital have remained stable at 17%. Since 17% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

The Bottom Line On M+S Hydraulic AD's ROCE

In the end, M+S Hydraulic AD has proven its ability to adequately reinvest capital at good rates of return. And since the stock has risen strongly over the last five years, it appears the market might expect this trend to continue. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

If you're still interested in M+S Hydraulic AD it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

While M+S Hydraulic AD 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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