This analysis is intended to introduce important early concepts to people who are starting to invest and want a simplistic look at the return on MTU Aero Engines AG (ETR:MTX) stock.
MTU Aero Engines stock represents an ownership share in the company. Your equity share is granted in return for the capital provided to the business to operate, and in order for an investment to be successful the business has to create earnings from the funds that make up this capital. Your return is tied to MTX’s ability to do this because the amount earned is used to invest in opportunities to grow the business or payout dividends, which are the two sources of return on investment. Therefore, looking at how efficiently MTU Aero Engines is able to use capital to create earnings will help us understand your potential return. Investors use many different metrics but the analysis below focuses on return on capital employed (ROCE). Let’s take a look at what it can tell us.View out our latest analysis for MTU Aero Engines
MTU Aero Engines’s Return On Capital Employed
Choosing to invest in MTU Aero Engines comes at the cost of investing in another potentially favourable company. Accordingly, before you invest you need to assess the capital returns that the company has produced with reference to a certain benchmark to ensure that you are confident in the business’ ability to grow your capital at a level that grants an investment over other companies. A good metric to use is return on capital employed (ROCE), which helps us gauge how much income can be created from the funds needed to operate the business. This metric will tell us if MTU Aero Engines is good at growing investor capital. MTX’s ROCE is calculated below:
ROCE Calculation for MTX
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = €592.30m ÷ (€6.05b – €2.13b) = 15.13%
The calculation above shows that MTX’s earnings were 15.13% of capital employed. A good ROCE hurdle you should aim for in your investments is 15%, which is exceeded by MTX and means the company creates a solid amount of earnings on capital employed. If this can be sustained with good reinvestment opportunities or dividend distributions your capital has the potential to compound over time.
Can any of this change?
MTU Aero Engines’s relatively strong ROCE is tied to the movement in two factors that change over time: earnings and capital requirements. At the moment MTU Aero Engines is in a favourable position, but this can change if these factors underperform. Therefore, investors need to be confident in the trend of the inputs in the formula above, so that MTU Aero Engines will continue the solid returns. Looking at the past 3 year period shows us that MTX boosted investor return on capital employed from 11.18%. With this, the current earnings of €592.30m improved from €332.70m and capital employed also increased but to a smaller extent, which means the company has been able to improve ROCE by driving up earnings relative to the capital invested in the business.
ROCE for MTX investors has grown in the last few years and is currently at a level that makes the company an attractive candidate that is capable of producing solid capital returns, and hence, an attractive return on investment. This is an ideal situation to be in, but return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like future prospects and valuation. Without considering these fundamentals, you cannot be sure if this trend will continue or if you are getting a good deal for the future returns you are paying for. MTU Aero Engines’s fundamentals can be explored with the links I’ve provided below if you are interested, otherwise you can start looking at other high-performing stocks.
- Future Outlook: What are well-informed industry analysts predicting for MTX’s future growth? Take a look at our free research report of analyst consensus for MTX’s outlook.
- Valuation: What is MTX worth today? Is the stock undervalued, even if its ROCE is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether MTX is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.