Stock Analysis

Will the Promising Trends At Major Drilling Group International (TSE:MDI) Continue?

  •  Updated
TSX:MDI
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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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Major Drilling Group International's (TSE:MDI) returns on capital, so let's have a look.

Understanding 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. Analysts use this formula to calculate it for Major Drilling Group International:

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

0.011 = CA$3.6m ÷ (CA$396m - CA$66m) (Based on the trailing twelve months to October 2020).

Therefore, Major Drilling Group International has an ROCE of 1.1%. On its own that's a low return, but compared to the average of 0.5% generated by the Metals and Mining industry, it's much better.

Check out our latest analysis for Major Drilling Group International

roce
TSX:MDI Return on Capital Employed February 23rd 2021

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 Does the ROCE Trend For Major Drilling Group International Tell Us?

It's great to see that Major Drilling Group International has started to generate some pre-tax earnings from prior investments. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 1.1% on their capital employed. Additionally, the business is utilizing 34% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. Major Drilling Group International could be selling under-performing assets since the ROCE is improving.

What We Can Learn From Major Drilling Group International's ROCE

In summary, it's great to see that Major Drilling Group International has been able to turn things around and earn higher returns on lower amounts of capital. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 10% to shareholders. So with that in mind, we think the stock deserves further research.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation on our platform that is definitely worth checking out.

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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