Megacable Holdings S. A. B. de C. V (BMV:MEGACPO) Could Be Struggling To Allocate Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. 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.

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. 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$6.5b ÷ (Mex$73b - Mex$12b) (Based on the trailing twelve months to March 2024).

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 8.5% generated by the Media industry.

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

In the above chart we have measured Megacable Holdings S. A. B. de C. V's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Megacable Holdings S. A. B. de C. V .

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

On the surface, the trend of ROCE at Megacable Holdings S. A. B. de C. V doesn't inspire confidence. To be more specific, ROCE has fallen from 19% 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

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. However, despite the promising trends, the stock has fallen 23% over the last five years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Megacable Holdings S. A. B. de C. V (of which 1 can't be ignored!) that you should know about.

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