Returns Are Gaining Momentum At MDA (TSE:MDA)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. With that in mind, we've noticed some promising trends at MDA (TSE:MDA) so let's look a bit deeper.

What Is 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. The formula for this calculation on MDA is:

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

0.052 = CA$80m ÷ (CA$1.9b - CA$332m) (Based on the trailing twelve months to September 2023).

So, MDA has an ROCE of 5.2%. In absolute terms, that's a low return and it also under-performs the Aerospace & Defense industry average of 9.4%.

See 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'd like, you can check out the forecasts from the analysts covering MDA here for free.

How Are Returns Trending?

We're delighted to see that MDA is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses two years ago, but now it's earning 5.2% which is a sight for sore eyes. In addition to that, MDA is employing 20% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

The Bottom Line On MDA's ROCE

Long story short, we're delighted to see that MDA's reinvestment activities have paid off and the company is now profitable. Since the stock has returned a solid 77% to shareholders over the last year, it's fair to say investors are beginning to recognize these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you'd like to know about the risks facing MDA, we've discovered 1 warning sign that you should be aware of.

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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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.