To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at MTR (HKG:66), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What is it?
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. The formula for this calculation on MTR is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.049 = HK$14b ÷ (HK$292b - HK$16b) (Based on the trailing twelve months to December 2021).
Thus, MTR has an ROCE of 4.9%. Even though it's in line with the industry average of 4.9%, it's still a low return by itself.
View our latest analysis for MTR
Above you can see how the current ROCE for MTR 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 MTR here for free.
So How Is MTR's ROCE Trending?
There are better returns on capital out there than what we're seeing at MTR. Over the past five years, ROCE has remained relatively flat at around 4.9% and the business has deployed 20% 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.
The Bottom Line On MTR's ROCE
In conclusion, MTR has been investing more capital into the business, but returns on that capital haven't increased. And investors may be recognizing these trends since the stock has only returned a total of 9.7% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
If you want to continue researching MTR, you might be interested to know about the 1 warning sign that our analysis has discovered.
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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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.
About SEHK:66
MTR
Designs, constructs, operates, maintains, and invests in railways in Hong Kong, Australia, Mainland China, Macao, Sweden, and the United Kingdom.
Solid track record with adequate balance sheet.
