Return Trends At MTY Food Group (TSE:MTY) Aren't Appealing

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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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 MTY Food Group (TSE:MTY), it didn't seem to tick all of these boxes.

Understanding 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. To calculate this metric for MTY Food Group, this is the formula:

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

0.072 = CA$160m ÷ (CA$2.7b - CA$454m) (Based on the trailing twelve months to May 2023).

Thus, MTY Food Group has an ROCE of 7.2%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 10%.

Check out our latest analysis for MTY Food Group

In the above chart we have measured MTY Food Group'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 MTY Food Group here for free.

How Are Returns Trending?

The returns on capital haven't changed much for MTY Food Group in recent years. Over the past five years, ROCE has remained relatively flat at around 7.2% and the business has deployed 125% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

In Conclusion...

In summary, MTY Food Group has simply been reinvesting capital and generating the same low rate of return as before. Unsurprisingly, the stock has only gained 1.8% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

One more thing to note, we've identified 3 warning signs with MTY Food Group and understanding them should be part of your investment process.

While MTY Food Group 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. 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.