MTU Aero Engines (ETR:MTX) Will Be Hoping To Turn Its Returns On Capital Around

By
Simply Wall St
Published
August 09, 2021
XTRA:MTX
Source: Shutterstock

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Although, when we looked at MTU Aero Engines (ETR:MTX), it didn't seem to tick all of these boxes.

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. To calculate this metric for MTU Aero Engines, this is the formula:

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

0.053 = €268m ÷ (€8.1b - €3.0b) (Based on the trailing twelve months to June 2021).

Thus, MTU Aero Engines has an ROCE of 5.3%. Ultimately, that's a low return and it under-performs the Aerospace & Defense industry average of 8.5%.

View our latest analysis for MTU Aero Engines

roce
XTRA:MTX Return on Capital Employed August 10th 2021

In the above chart we have measured MTU Aero Engines' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for MTU Aero Engines.

What Can We Tell From MTU Aero Engines' ROCE Trend?

On the surface, the trend of ROCE at MTU Aero Engines doesn't inspire confidence. Around five years ago the returns on capital were 13%, but since then they've fallen to 5.3%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Key Takeaway

We're a bit apprehensive about MTU Aero Engines because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Yet despite these poor fundamentals, the stock has gained a huge 134% over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a final note, we've found 3 warning signs for MTU Aero Engines that we think you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

When trading MTU Aero Engines or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted


Discounted cash flow calculation for every stock

Simply Wall St does a detailed discounted cash flow calculation every 6 hours for every stock on the market, so if you want to find the intrinsic value of any company just search here. It’s FREE.

Make Confident Investment Decisions

Simply Wall St's Editorial Team provides unbiased, factual reporting on global stocks using in-depth fundamental analysis.
Find out more about our editorial guidelines and team.