Investors Could Be Concerned With Megacable Holdings S. A. B. de C. V's (BMV:MEGACPO) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Megacable Holdings S. A. B. de C. V (BMV:MEGACPO) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

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 Megacable Holdings S. A. B. de C. V:

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

0.11 = Mex$6.1b ÷ (Mex$67b - Mex$11b) (Based on the trailing twelve months to September 2023).

So, Megacable Holdings S. A. B. de C. V has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 6.5% generated by the Media industry.

See our latest analysis for Megacable Holdings S. A. B. de C. V

Above you can see how the current ROCE for Megacable Holdings S. A. B. de C. V compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Megacable Holdings S. A. B. de C. V here for free.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Megacable Holdings S. A. B. de C. V, we didn't gain much confidence. To be more specific, ROCE has fallen from 20% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From Megacable Holdings S. A. B. de C. V's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Megacable Holdings S. A. B. de C. V is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 54% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Megacable Holdings S. A. B. de C. V does have some risks, we noticed 2 warning signs (and 1 which can't be ignored) we think you should know about.

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. 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.