What Do The Returns On Capital At Midwich Group (LON:MIDW) Tell Us?

There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. However, after investigating Midwich Group (LON:MIDW), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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. 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%. On its own, that's a low figure but it's around the 8.2% average generated by the Electronic industry.

Check out our latest analysis for Midwich Group

Above you can see how the current ROCE for Midwich Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Midwich Group here for free.

The Trend Of ROCE

The trend of ROCE doesn't look fantastic because it's fallen from 44% five years ago, while the business's capital employed increased by 533%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Midwich Group might not have received a full period of earnings contribution from it.

On a related note, Midwich Group has decreased 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. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

The Bottom Line On Midwich Group's ROCE

To conclude, we've found that Midwich Group is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 20% in the last three years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Midwich Group does have some risks though, and we've spotted 2 warning signs for Midwich Group that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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