Returns On Capital At Mulberry Group (LON:MUL) Have Stalled

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Mulberry Group (LON:MUL), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What is it?

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

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

0.067 = UK£5.5m ÷ (UK£120m - UK£37m) (Based on the trailing twelve months to March 2021).

Therefore, Mulberry Group has an ROCE of 6.7%. Ultimately, that's a low return and it under-performs the Luxury industry average of 12%.

Check out our latest analysis for Mulberry Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Mulberry Group's ROCE against it's prior returns. If you'd like to look at how Mulberry Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Mulberry Group's ROCE Trending?

Things have been pretty stable at Mulberry Group, with its capital employed and returns on that capital staying somewhat the same for the last five years. 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 unless we see a substantial change at Mulberry Group in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

The Bottom Line

In summary, Mulberry Group isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And investors appear hesitant that the trends will pick up because the stock has fallen 66% in the last five years. Therefore based on the analysis done in this article, we don't think Mulberry Group has the makings of a multi-bagger.

One more thing, we've spotted 2 warning signs facing Mulberry Group that you might find interesting.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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.

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