Why We Like The Returns At Morgan Sindall Group (LON:MGNS)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. So when we looked at the ROCE trend of Morgan Sindall Group (LON:MGNS) we really liked what we saw.

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

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 Sindall Group, this is the formula:

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

0.22 = UK£129m ÷ (UK£1.7b - UK£1.1b) (Based on the trailing twelve months to June 2022).

So, Morgan Sindall Group has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Construction industry average of 7.2%.

View our latest analysis for Morgan Sindall Group

In the above chart we have measured Morgan Sindall Group's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

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

The trends we've noticed at Morgan Sindall Group are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 22%. The amount of capital employed has increased too, by 83%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a separate but related note, it's important to know that Morgan Sindall Group has a current liabilities to total assets ratio of 64%, 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

To sum it up, Morgan Sindall Group has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 63% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.

Morgan Sindall Group does have some risks, we noticed 2 warning signs (and 1 which is concerning) we think you should know about.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.