Methanex (TSE:MX) Shareholders Will Want The ROCE Trajectory To Continue

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Speaking of which, we noticed some great changes in Methanex's (TSE:MX) returns on capital, so let's have a look.

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. The formula for this calculation on Methanex is:

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

0.14 = US$712m ÷ (US$6.1b - US$963m) (Based on the trailing twelve months to December 2021).

Thus, Methanex has an ROCE of 14%. That's a relatively normal return on capital, and it's around the 13% generated by the Chemicals industry.

Check out our latest analysis for Methanex

Above you can see how the current ROCE for Methanex 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 Methanex here for free.

So How Is Methanex's ROCE Trending?

Methanex has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 14% which is a sight for sore eyes. Not only that, but the company is utilizing 30% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

The Key Takeaway

Long story short, we're delighted to see that Methanex's reinvestment activities have paid off and the company is now profitable. Considering the stock has delivered 28% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

If you'd like to know more about Methanex, we've spotted 4 warning signs, and 1 of them shouldn't be ignored.

While Methanex 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.