Should We Be Excited About The Trends Of Returns At MJ Gleeson (LON:GLE)?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at MJ Gleeson (LON:GLE) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for MJ Gleeson:

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%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 7.8%.

See 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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

We weren't thrilled with the trend because MJ Gleeson's ROCE has reduced by 75% over the last five years, while the business employed 65% more capital. Usually this isn't ideal, but given MJ Gleeson conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. MJ Gleeson probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

Our Take On MJ Gleeson's ROCE

In summary, we're somewhat concerned by MJ Gleeson's diminishing returns on increasing amounts of capital. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 72% return. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

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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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