AS Merko Ehitus (TAL:MRK1T) Might Have The Makings Of A Multi-Bagger

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at AS Merko Ehitus (TAL:MRK1T) so let's look a bit deeper.

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 AS Merko Ehitus, this is the formula:

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

0.14 = €25m ÷ (€257m - €77m) (Based on the trailing twelve months to December 2020).

Therefore, AS Merko Ehitus has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Construction industry average of 11% it's much better.

See our latest analysis for AS Merko Ehitus

Historical performance is a great place to start when researching a stock so above you can see the gauge for AS Merko Ehitus' ROCE against it's prior returns. If you'd like to look at how AS Merko Ehitus has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is AS Merko Ehitus' ROCE Trending?

AS Merko Ehitus is showing promise given that its ROCE is trending up and to the right. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 109% over the last five years. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

The Key Takeaway

In summary, we're delighted to see that AS Merko Ehitus has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a staggering 102% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Like most companies, AS Merko Ehitus does come with some risks, and we've found 2 warning signs that you should be aware of.

While AS Merko Ehitus 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. 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.
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