Be Wary Of MJ Gleeson (LON:GLE) And Its Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at MJ Gleeson (LON:GLE) and its ROCE trend, we weren't exactly thrilled.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on MJ Gleeson is:

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

0.053 = UK£12m ÷ (UK£287m - UK£53m) (Based on the trailing twelve months to December 2020).

So, MJ Gleeson has an ROCE of 5.3%. On its own, that's a low figure but it's around the 6.1% average generated by the Consumer Durables industry.

Check out our latest analysis for MJ Gleeson

In the above chart we have measured MJ Gleeson's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering MJ Gleeson here for free.

So How Is MJ Gleeson's ROCE Trending?

Unfortunately, the trend isn't great with ROCE falling from 21% five years ago, while capital employed has grown 65%. That being said, MJ Gleeson raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence MJ Gleeson might not have received a full period of earnings contribution from it.

The Bottom Line

In summary, we're somewhat concerned by MJ Gleeson's diminishing returns on increasing amounts of capital. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 141%. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One more thing to note, we've identified 1 warning sign with MJ Gleeson and understanding this should be part of your investment process.

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.

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This article by Simply Wall St is general in nature. 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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