Grupo Mexicano de Desarrollo (BMV:GMD) Has More To Do To Multiply In Value Going Forward

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. However, after briefly looking over the numbers, we don't think Grupo Mexicano de Desarrollo (BMV:GMD) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is 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. To calculate this metric for Grupo Mexicano de Desarrollo, this is the formula:

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

0.11 = Mex$1.0b ÷ (Mex$10b - Mex$1.3b) (Based on the trailing twelve months to December 2021).

Thus, Grupo Mexicano de Desarrollo has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 5.6% generated by the Construction industry.

See our latest analysis for Grupo Mexicano de Desarrollo

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Grupo Mexicano de Desarrollo, check out these free graphs here.

The Trend Of ROCE

Over the past five years, Grupo Mexicano de Desarrollo's ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So unless we see a substantial change at Grupo Mexicano de Desarrollo in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

Our Take On Grupo Mexicano de Desarrollo's ROCE

In a nutshell, Grupo Mexicano de Desarrollo has been trudging along with the same returns from the same amount of capital over the last five years. Since the stock has declined 53% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you're still interested in Grupo Mexicano de Desarrollo it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

While Grupo Mexicano de Desarrollo isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.