Is Morneau Shepell (TSE:MSI) Likely To Turn Things Around?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Morneau Shepell (TSE:MSI), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for Morneau Shepell, this is the formula:

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

0.044 = CA$59m ÷ (CA$1.5b - CA$167m) (Based on the trailing twelve months to December 2020).

Thus, Morneau Shepell has an ROCE of 4.4%. Ultimately, that's a low return and it under-performs the Professional Services industry average of 8.2%.

Check out our latest analysis for Morneau Shepell

In the above chart we have measured Morneau Shepell's prior ROCE against its prior performance, but the future is arguably more important. 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 Morneau Shepell's ROCE Trend?

On the surface, the trend of ROCE at Morneau Shepell doesn't inspire confidence. Around five years ago the returns on capital were 8.7%, but since then they've fallen to 4.4%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On Morneau Shepell's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Morneau Shepell. And long term investors must be optimistic going forward because the stock has returned a huge 136% to shareholders in the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Morneau Shepell does have some risks, we noticed 3 warning signs (and 1 which is a bit unpleasant) we think you should know about.

While Morneau Shepell 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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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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