Here's What To Make Of Morgan Advanced Materials' (LON:MGAM) Decelerating Rates Of Return

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Morgan Advanced Materials (LON:MGAM), 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. The formula for this calculation on Morgan Advanced Materials is:

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

0.15 = UK£117m ÷ (UK£1.0b - UK£240m) (Based on the trailing twelve months to December 2023).

So, Morgan Advanced Materials has an ROCE of 15%. That's a relatively normal return on capital, and it's around the 13% generated by the Machinery industry.

See our latest analysis for Morgan Advanced Materials

Above you can see how the current ROCE for Morgan Advanced Materials 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 Morgan Advanced Materials for free.

What Can We Tell From Morgan Advanced Materials' ROCE Trend?

Things have been pretty stable at Morgan Advanced Materials, with its capital employed and returns on that capital staying somewhat the same for the last five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So unless we see a substantial change at Morgan Advanced Materials in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger. With fewer investment opportunities, it makes sense that Morgan Advanced Materials has been paying out a decent 38% of its earnings to shareholders. Given the business isn't reinvesting in itself, it makes sense to distribute a portion of earnings among shareholders.

Our Take On Morgan Advanced Materials' ROCE

We can conclude that in regards to Morgan Advanced Materials' returns on capital employed and the trends, there isn't much change to report on. And with the stock having returned a mere 31% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

One more thing to note, we've identified 4 warning signs with Morgan Advanced Materials and understanding these should be part of your investment process.

While Morgan Advanced Materials 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.