Morgan Sindall Group (LON:MGNS) Is Investing Its Capital With Increasing Efficiency

By
Simply Wall St
Published
May 11, 2022
LSE:MGNS
Source: Shutterstock

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Speaking of which, we noticed some great changes in Morgan Sindall Group's (LON:MGNS) returns on capital, so let's have a look.

What is Return On Capital Employed (ROCE)?

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. To calculate this metric for Morgan Sindall Group, this is the formula:

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

0.21 = UK£124m ÷ (UK£1.7b - UK£1.1b) (Based on the trailing twelve months to December 2021).

Thus, Morgan Sindall Group has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Construction industry average of 8.9%.

See our latest analysis for Morgan Sindall Group

roce
LSE:MGNS Return on Capital Employed May 11th 2022

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 to see what analysts are forecasting going forward, you should check out our free report for Morgan Sindall Group.

What The Trend Of ROCE Can Tell Us

We like the trends that we're seeing from Morgan Sindall Group. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 21%. Basically the business is earning more per dollar of capital invested and in addition to that, 75% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

On a side note, Morgan Sindall Group's current liabilities are still rather high at 66% of total assets. 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 On Morgan Sindall Group's ROCE

All in all, it's terrific to see that Morgan Sindall Group is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a solid 85% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One more thing to note, we've identified 3 warning signs with Morgan Sindall Group and understanding these should be part of your investment process.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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