Has Mediterranean Towers (TLV:MDTR) Got What It Takes To Become A Multi-Bagger?

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Mediterranean Towers (TLV:MDTR) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. The formula for this calculation on Mediterranean Towers is:

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

0.0089 = ₪19m ÷ (₪4.4b - ₪2.3b) (Based on the trailing twelve months to September 2020).

Therefore, Mediterranean Towers has an ROCE of 0.9%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 9.5%.

See our latest analysis for Mediterranean Towers

Historical performance is a great place to start when researching a stock so above you can see the gauge for Mediterranean Towers' ROCE against it's prior returns. If you'd like to look at how Mediterranean Towers has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Mediterranean Towers' ROCE Trend?

In terms of Mediterranean Towers' historical ROCE trend, it doesn't exactly demand attention. Over the past five years, ROCE has remained relatively flat at around 0.9% and the business has deployed 70% 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.

On a side note, Mediterranean Towers' current liabilities are still rather high at 52% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Mediterranean Towers' ROCE

In summary, Mediterranean Towers has simply been reinvesting capital and generating the same low rate of return as before. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 179% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Mediterranean Towers does come with some risks though, we found 5 warning signs in our investment analysis, and 2 of those are potentially serious...

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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This article by Simply Wall St is general in nature. 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.
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