Mediterranean Towers (TLV:MDTR) Has More To Do To Multiply In Value Going Forward

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. 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)

0.0092 = ₪19m ÷ (₪4.2b - ₪2.1b) (Based on the trailing twelve months to December 2020).

Therefore, Mediterranean Towers has an ROCE of 0.9%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 9.6%.

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?

The returns on capital haven't changed much for Mediterranean Towers in recent years. The company has consistently earned 0.9% for the last five years, and the capital employed within the business has risen 45% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

On a side note, Mediterranean Towers' current liabilities are still rather high at 50% 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

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 181% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Mediterranean Towers does have some risks, we noticed 3 warning signs (and 2 which make us uncomfortable) we think you should know about.

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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