Returns On Capital At Grupo Mexicano de Desarrollo (BMV:GMD) Paint An Interesting Picture

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Having said that, from a first glance at Grupo Mexicano de Desarrollo (BMV:GMD) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is 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. 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)

0.096 = Mex$824m ÷ (Mex$9.8b - Mex$1.2b) (Based on the trailing twelve months to September 2020).

Thus, Grupo Mexicano de Desarrollo has an ROCE of 9.6%. In absolute terms, that's a low return, but it's much better than the Construction industry average of 3.9%.

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'd like to look at how Grupo Mexicano de Desarrollo has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

There are better returns on capital out there than what we're seeing at Grupo Mexicano de Desarrollo. The company has consistently earned 9.6% for the last five years, and the capital employed within the business has risen 24% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

What We Can Learn From Grupo Mexicano de Desarrollo's ROCE

In conclusion, Grupo Mexicano de Desarrollo has been investing more capital into the business, but returns on that capital haven't increased. And with the stock having returned a mere 9.6% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

If you'd like to know about the risks facing Grupo Mexicano de Desarrollo, we've discovered 1 warning sign that you should be aware of.

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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