Returns On Capital At Morgan Advanced Materials (LON:MGAM) Have Stalled

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Morgan Advanced Materials (LON:MGAM) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Morgan Advanced Materials, this is the formula:

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

0.15 = UK£114m ÷ (UK£1.0b - UK£250m) (Based on the trailing twelve months to June 2025).

Therefore, Morgan Advanced Materials has an ROCE of 15%. That's a relatively normal return on capital, and it's around the 14% generated by the Machinery industry.

Check out 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 to see what analysts are forecasting going forward, you should check out our free analyst report for Morgan Advanced Materials .

So How Is Morgan Advanced Materials' ROCE Trending?

Over the past five years, Morgan Advanced Materials' ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if Morgan Advanced Materials doesn't end up being a multi-bagger in a few years time. With fewer investment opportunities, it makes sense that Morgan Advanced Materials has been paying out a decent 48% of its earnings to shareholders. Given the business isn't reinvesting in itself, it makes sense to distribute a portion of earnings among shareholders.

In Conclusion...

In summary, Morgan Advanced Materials isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And with the stock having returned a mere 5.5% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

Morgan Advanced Materials does have some risks, we noticed 4 warning signs (and 1 which is a bit concerning) we think you should know about.

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.