The Trends At Morneau Shepell (TSE:MSI) That You Should Know About

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after investigating Morneau Shepell (TSE:MSI), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

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. 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)

0.059 = CA$81m ÷ (CA$1.5b - CA$175m) (Based on the trailing twelve months to September 2020).

Therefore, Morneau Shepell has an ROCE of 5.9%. In absolute terms, that's a low return and it also under-performs the Professional Services industry average of 7.9%.

View 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'd like, you can check out the forecasts from the analysts covering Morneau Shepell here for free.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Morneau Shepell doesn't inspire confidence. Over the last five years, returns on capital have decreased to 5.9% from 8.5% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From Morneau Shepell's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Morneau Shepell is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 145% to shareholders in the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

On a final note, we found 3 warning signs for Morneau Shepell (1 can't be ignored) you should be aware of.

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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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