Stock Analysis

Capital Allocation Trends At Martinrea International (TSE:MRE) Aren't Ideal

TSX:MRE
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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Martinrea International (TSE:MRE) and its ROCE trend, we weren't exactly thrilled.

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 Martinrea International is:

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

0.026 = CA$65m ÷ (CA$3.9b - CA$1.4b) (Based on the trailing twelve months to June 2022).

Thus, Martinrea International has an ROCE of 2.6%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 8.6%.

Check out our latest analysis for Martinrea International

roce
TSX:MRE Return on Capital Employed September 30th 2022

Above you can see how the current ROCE for Martinrea International compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Martinrea International's ROCE Trending?

When we looked at the ROCE trend at Martinrea International, we didn't gain much confidence. To be more specific, ROCE has fallen from 12% over the last five years. However it looks like Martinrea International might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On Martinrea International's ROCE

In summary, Martinrea International is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 23% over the last five years, investors may not be too optimistic on this trend improving either. 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.

On a final note, we found 4 warning signs for Martinrea International (1 shouldn't be ignored) you should be aware of.

While Martinrea International isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Valuation is complex, but we're helping make it simple.

Find out whether Martinrea International is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.