Here's What To Make Of Michelmersh Brick Holdings' (LON:MBH) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Michelmersh Brick Holdings (LON:MBH) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

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 Michelmersh Brick Holdings, this is the formula:

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

0.067 = UK£7.3m ÷ (UK£126m - UK£16m) (Based on the trailing twelve months to June 2020).

Thus, Michelmersh Brick Holdings has an ROCE of 6.7%. In absolute terms, that's a low return but it's around the Basic Materials industry average of 8.3%.

View our latest analysis for Michelmersh Brick Holdings

In the above chart we have measured Michelmersh Brick Holdings' 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 Does the ROCE Trend For Michelmersh Brick Holdings Tell Us?

There are better returns on capital out there than what we're seeing at Michelmersh Brick Holdings. Over the past five years, ROCE has remained relatively flat at around 6.7% and the business has deployed 107% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

In Conclusion...

In conclusion, Michelmersh Brick Holdings has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has gained an impressive 74% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

On a final note, we've found 2 warning signs for Michelmersh Brick Holdings that we think you should be aware of.

While Michelmersh Brick Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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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