Returns Are Gaining Momentum At MDA (TSE:MDA)

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. So when we looked at MDA (TSE:MDA) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on MDA is:

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

0.03 = CA$41m ÷ (CA$1.6b - CA$250m) (Based on the trailing twelve months to June 2022).

So, MDA has an ROCE of 3.0%. Ultimately, that's a low return and it under-performs the Aerospace & Defense industry average of 6.7%.

View our latest analysis for MDA

Above you can see how the current ROCE for MDA 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.

What Can We Tell From MDA's ROCE Trend?

MDA has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company was generating losses one year ago, but has managed to turn it around and as we saw earlier is now earning 3.0%, which is always encouraging. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

What We Can Learn From MDA's ROCE

To sum it up, MDA is collecting higher returns from the same amount of capital, and that's impressive. And since the stock has fallen 47% over the last year, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

One more thing, we've spotted 1 warning sign facing MDA that you might find interesting.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.