Is Midwich Group (LON:MIDW) Likely To Turn Things Around?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Midwich Group (LON:MIDW) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on Midwich Group is:

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

0.087 = UK£14m ÷ (UK£317m - UK£155m) (Based on the trailing twelve months to June 2020).

Therefore, Midwich Group has an ROCE of 8.7%. In absolute terms, that's a low return but it's around the Electronic industry average of 8.4%.

Check out our latest analysis for Midwich Group

In the above chart we have measured Midwich Group'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 Midwich Group here for free.

So How Is Midwich Group's ROCE Trending?

Unfortunately, the trend isn't great with ROCE falling from 44% five years ago, while capital employed has grown 533%. That being said, Midwich Group raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Midwich Group's earnings and if they change as a result from the capital raise.

On a side note, Midwich Group has done well to pay down its current liabilities to 49% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Keep in mind 49% is still pretty high, so those risks are still somewhat prevalent.

The Bottom Line On Midwich Group's ROCE

In summary, Midwich Group is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Unsurprisingly, the stock has only gained 2.3% over the last three years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

On a final note, we've found 4 warning signs for Midwich Group that we think you should be aware of.

While Midwich Group 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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