Has Maisons du Monde (EPA:MDM) Got What It Takes To Become A Multi-Bagger?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. However, after investigating Maisons du Monde (EPA:MDM), we don't think it's current trends fit the mold of a multi-bagger.

What is 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 Maisons du Monde:

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

0.053 = €85m ÷ (€2.2b - €651m) (Based on the trailing twelve months to June 2020).

Therefore, Maisons du Monde has an ROCE of 5.3%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 9.7%.

See our latest analysis for Maisons du Monde

Above you can see how the current ROCE for Maisons du Monde 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 Maisons du Monde here for free.

What Can We Tell From Maisons du Monde's ROCE Trend?

When we looked at the ROCE trend at Maisons du Monde, we didn't gain much confidence. To be more specific, ROCE has fallen from 7.3% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Maisons du Monde's current liabilities have increased over the last five years to 29% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

What We Can Learn From Maisons du Monde's ROCE

In summary, Maisons du Monde is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 59% over the last three years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

One more thing, we've spotted 2 warning signs facing Maisons du Monde that you might find interesting.

While Maisons du Monde isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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