Return Trends At Michelmersh Brick Holdings (LON:MBH) Aren't Appealing

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. 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.

What is Return On Capital Employed (ROCE)?

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 Michelmersh Brick Holdings:

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

0.074 = UK£7.6m ÷ (UK£116m - UK£14m) (Based on the trailing twelve months to December 2020).

Thus, Michelmersh Brick Holdings has an ROCE of 7.4%. Even though it's in line with the industry average of 7.4%, it's still a low return by itself.

See 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'd like, you can check out the forecasts from the analysts covering Michelmersh Brick Holdings here for free.

The Trend Of ROCE

There are better returns on capital out there than what we're seeing at Michelmersh Brick Holdings. The company has consistently earned 7.4% for the last five years, and the capital employed within the business has risen 92% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

In Conclusion...

Long story short, while Michelmersh Brick Holdings has been reinvesting its capital, the returns that it's generating haven't increased. Yet to long term shareholders the stock has gifted them an incredible 108% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

On a separate note, we've found 2 warning signs for Michelmersh Brick Holdings you'll probably want to know about.

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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