What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. However, after investigating Maire Tecnimont (BIT:MT), we don't think it's current trends fit the mold of a multi-bagger.
What is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Maire Tecnimont, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.048 = €72m ÷ (€4.9b - €3.4b) (Based on the trailing twelve months to March 2021).
Therefore, Maire Tecnimont has an ROCE of 4.8%. Even though it's in line with the industry average of 4.8%, it's still a low return by itself.
Check out our latest analysis for Maire Tecnimont
In the above chart we have measured Maire Tecnimont's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
The Trend Of ROCE
On the surface, the trend of ROCE at Maire Tecnimont doesn't inspire confidence. Around five years ago the returns on capital were 18%, but since then they've fallen to 4.8%. 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 separate but related note, it's important to know that Maire Tecnimont has a current liabilities to total assets ratio of 70%, which we'd consider pretty high. 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.
The Bottom Line On Maire Tecnimont's ROCE
We're a bit apprehensive about Maire Tecnimont because despite more capital being deployed in the business, returns on that capital and sales have both fallen. However the stock has delivered a 43% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.
If you want to continue researching Maire Tecnimont, you might be interested to know about the 2 warning signs that our analysis has discovered.
While Maire Tecnimont 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. 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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About BIT:MAIRE
Maire
MAIRE S.p.A. develops and implements various solutions to enable the energy transition.
Flawless balance sheet with solid track record.
