Stock Analysis

Major Drilling Group International (TSE:MDI) Might Have The Makings Of A Multi-Bagger

  •  Updated
TSX:MDI
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If you're looking for a multi-bagger, there's a few things to keep an eye out 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Major Drilling Group International (TSE:MDI) looks quite promising in regards to its trends of return on capital.

What is 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 Major Drilling Group International, this is the formula:

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

0.06 = CA$24m ÷ (CA$486m - CA$89m) (Based on the trailing twelve months to July 2021).

Thus, Major Drilling Group International has an ROCE of 6.1%. In absolute terms, that's a low return, but it's much better than the Metals and Mining industry average of 2.7%.

See our latest analysis for Major Drilling Group International

roce
TSX:MDI Return on Capital Employed September 3rd 2021

Above you can see how the current ROCE for Major Drilling Group International 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 Major Drilling Group International here for free.

What Can We Tell From Major Drilling Group International's ROCE Trend?

Major Drilling Group International has broken into the black (profitability) and we're sure it's a sight for sore eyes. While the business was unprofitable in the past, it's now turned things around and is earning 6.1% on its capital. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

The Bottom Line

To bring it all together, Major Drilling Group International has done well to increase the returns it's generating from its capital employed. Since the stock has only returned 29% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.

On a separate note, we've found 1 warning sign for Major Drilling Group International you'll probably want to know about.

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