Investors Shouldn't Overlook The Favourable Returns On Capital At Morgan Sindall Group (LON:MGNS)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So, when we ran our eye over Morgan Sindall Group's (LON:MGNS) trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Morgan Sindall Group:

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

0.20 = UK£137m ÷ (UK£2.0b - UK£1.3b) (Based on the trailing twelve months to June 2024).

Therefore, Morgan Sindall Group has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Construction industry average of 15%.

See our latest analysis for Morgan Sindall Group

Above you can see how the current ROCE for Morgan Sindall Group 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 Sindall Group for free.

What Can We Tell From Morgan Sindall Group's ROCE Trend?

In terms of Morgan Sindall Group's history of ROCE, it's quite impressive. Over the past five years, ROCE has remained relatively flat at around 20% and the business has deployed 49% more capital into its operations. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Morgan Sindall Group can keep this up, we'd be very optimistic about its future.

On a separate but related note, it's important to know that Morgan Sindall Group has a current liabilities to total assets ratio of 66%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. On top of that, the stock has rewarded shareholders with a remarkable 178% return to those who've held over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

If you want to continue researching Morgan Sindall Group, you might be interested to know about the 2 warning signs that our analysis has discovered.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.