Investors Could Be Concerned With MRO-TEK Realty's (NSE:MRO-TEK) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. However, after investigating MRO-TEK Realty (NSE:MRO-TEK), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on MRO-TEK Realty is:

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

0.0093 = ₹9.7m ÷ (₹1.6b - ₹560m) (Based on the trailing twelve months to December 2022).

Therefore, MRO-TEK Realty has an ROCE of 0.9%. Ultimately, that's a low return and it under-performs the Communications industry average of 20%.

Check out our latest analysis for MRO-TEK Realty

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

The Trend Of ROCE

In terms of MRO-TEK Realty's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 1.4%, but since then they've fallen to 0.9%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a related note, MRO-TEK Realty has decreased its current liabilities to 35% of total assets. So we could link some of this to the decrease in ROCE. 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.

Our Take On MRO-TEK Realty's ROCE

We're a bit apprehensive about MRO-TEK Realty because despite more capital being deployed in the business, returns on that capital and sales have both fallen. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 195%. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

MRO-TEK Realty does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those shouldn't be ignored...

While MRO-TEK Realty may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.