Why We Like The Returns At Major Drilling Group International (TSE:MDI)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. And in light of that, the trends we're seeing at Major Drilling Group International's (TSE:MDI) look very promising so lets take a look.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Major Drilling Group International is:

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

0.20 = CA$89m ÷ (CA$550m - CA$112m) (Based on the trailing twelve months to July 2022).

Thus, Major Drilling Group International has an ROCE of 20%. That's a fantastic return and not only that, it outpaces the average of 1.9% earned by companies in a similar industry.

Check out our latest analysis for Major Drilling Group International

In the above chart we have measured Major Drilling Group International'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 Major Drilling Group International here for free.

What The Trend Of ROCE Can Tell Us

Shareholders will be relieved that Major Drilling Group International has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 20%, which is always encouraging. While returns have increased, the amount of capital employed by Major Drilling Group International has remained flat over the period. 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 Key Takeaway

To sum it up, Major Drilling Group International is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has returned a solid 58% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Major Drilling Group International can keep these trends up, it could have a bright future ahead.

Like most companies, Major Drilling Group International does come with some risks, and we've found 1 warning sign that you should be aware of.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high 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.