There Are Reasons To Feel Uneasy About MTR's (HKG:66) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Having said that, from a first glance at MTR (HKG:66) 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 MTR:

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

0.036 = HK$12b ÷ (HK$361b - HK$29b) (Based on the trailing twelve months to June 2024).

So, MTR has an ROCE of 3.6%. In absolute terms, that's a low return and it also under-performs the Transportation industry average of 6.0%.

See our latest analysis for MTR

In the above chart we have measured MTR's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for MTR .

So How Is MTR's ROCE Trending?

When we looked at the ROCE trend at MTR, we didn't gain much confidence. To be more specific, ROCE has fallen from 5.2% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From MTR's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that MTR is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 32% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Like most companies, MTR does come with some risks, and we've found 1 warning sign that you should be aware of.

While MTR isn't earning the highest return, check out this free list of companies that are 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.