There Are Reasons To Feel Uneasy About Moneysupermarket.com Group's (LON:MONY) 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'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. So while Moneysupermarket.com Group (LON:MONY) has a high ROCE right now, lets see what we can decipher from how returns are changing.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Moneysupermarket.com Group, this is the formula:

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

0.30 = UK£89m ÷ (UK£409m - UK£114m) (Based on the trailing twelve months to December 2022).

Therefore, Moneysupermarket.com Group has an ROCE of 30%. That's a fantastic return and not only that, it outpaces the average of 25% earned by companies in a similar industry.

View our latest analysis for Moneysupermarket.com Group

Above you can see how the current ROCE for Moneysupermarket.com Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Moneysupermarket.com Group.

The Trend Of ROCE

On the surface, the trend of ROCE at Moneysupermarket.com Group doesn't inspire confidence. To be more specific, while the ROCE is still high, it's fallen from 59% where it was five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Moneysupermarket.com Group. These trends are starting to be recognized by investors since the stock has delivered a 8.2% gain to shareholders who've held over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

One more thing to note, we've identified 1 warning sign with Moneysupermarket.com Group and understanding it should be part of your investment process.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.