If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at MaltaPost (MTSE:MTP), it didn't seem to tick all of these boxes.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for MaltaPost:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.079 = €2.5m ÷ (€47m - €15m) (Based on the trailing twelve months to September 2020).
So, MaltaPost has an ROCE of 7.9%. In absolute terms, that's a low return but it's around the Logistics industry average of 8.5%.
View our latest analysis for MaltaPost
Historical performance is a great place to start when researching a stock so above you can see the gauge for MaltaPost's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of MaltaPost, check out these free graphs here.
How Are Returns Trending?
On the surface, the trend of ROCE at MaltaPost doesn't inspire confidence. To be more specific, ROCE has fallen from 13% over the last five years. However it looks like MaltaPost might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
The Bottom Line
In summary, MaltaPost is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 32% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for MaltaPost (of which 1 doesn't sit too well with us!) that you should know about.
While MaltaPost 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 MTSE:MTP
MaltaPost
Provides postal and financial services in Malta and internationally.
Flawless balance sheet with solid track record.
