Returns Are Gaining Momentum At McCoy Global (TSE:MCB)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at McCoy Global (TSE:MCB) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for McCoy Global, this is the formula:

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

0.0025 = CA$116k ÷ (CA$55m - CA$8.4m) (Based on the trailing twelve months to December 2021).

So, McCoy Global has an ROCE of 0.2%. Ultimately, that's a low return and it under-performs the Energy Services industry average of 7.6%.

See our latest analysis for McCoy Global

Historical performance is a great place to start when researching a stock so above you can see the gauge for McCoy Global's ROCE against it's prior returns. If you're interested in investigating McCoy Global's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

Like most people, we're pleased that McCoy Global is now generating some pretax earnings. While the business is profitable now, it used to be incurring losses on invested capital five years ago. In regards to capital employed, McCoy Global is using 26% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. This could potentially mean that the company is selling some of its assets.

What We Can Learn From McCoy Global's ROCE

From what we've seen above, McCoy Global has managed to increase it's returns on capital all the while reducing it's capital base. And since the stock has fallen 57% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

One more thing: We've identified 3 warning signs with McCoy Global (at least 1 which can't be ignored) , and understanding these would certainly be useful.

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.