Megacable Holdings S. A. B. de C. V (BMV:MEGACPO) May Have Issues Allocating Its Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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 Megacable Holdings S. A. B. de C. V (BMV:MEGACPO), it didn't seem to tick all of these boxes.

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. To calculate this metric for Megacable Holdings S. A. B. de C. V, this is the formula:

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

0.11 = Mex$6.3b ÷ (Mex$68b - Mex$11b) (Based on the trailing twelve months to December 2023).

Therefore, 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 8.7% generated by the Media industry.

View 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 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 Does the ROCE Trend For Megacable Holdings S. A. B. de C. V Tell Us?

On the surface, the trend of ROCE at Megacable Holdings S. A. B. de C. V doesn't inspire confidence. Over the last five years, returns on capital have decreased to 11% from 20% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

To conclude, we've found that Megacable Holdings S. A. B. de C. V is reinvesting in the business, but returns have been falling. Since the stock has declined 32% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Megacable Holdings S. A. B. de C. V has the makings of a multi-bagger.

If you want to know some of the risks facing Megacable Holdings S. A. B. de C. V we've found 3 warning signs (2 can't be ignored!) that you should be aware of before investing here.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.