Stock Analysis

Our Take On The Returns On Capital At Malta International Airport (MTSE:MIA)

MTSE:MIA
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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Malta International Airport (MTSE:MIA) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Malta International Airport is:

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

0.06 = €11m ÷ (€234m - €43m) (Based on the trailing twelve months to September 2020).

Therefore, Malta International Airport has an ROCE of 6.0%. Even though it's in line with the industry average of 6.2%, it's still a low return by itself.

See our latest analysis for Malta International Airport

roce
MTSE:MIA Return on Capital Employed January 21st 2021

Historical performance is a great place to start when researching a stock so above you can see the gauge for Malta International Airport's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Malta International Airport, check out these free graphs here.

What Does the ROCE Trend For Malta International Airport Tell Us?

In terms of Malta International Airport's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 24% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, Malta International Airport has decreased its current liabilities to 18% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

We're a bit apprehensive about Malta International Airport because despite more capital being deployed in the business, returns on that capital and sales have both fallen. However the stock has delivered a 56% 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 Malta International Airport, you might be interested to know about the 2 warning signs that our analysis has discovered.

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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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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