Returns On Capital At Megacable Holdings S. A. B. de C. V (BMV:MEGACPO) Have Hit The Brakes

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. So, when we ran our eye over Megacable Holdings S. A. B. de C. V's (BMV:MEGACPO) trend of ROCE, we liked what we saw.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from 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)

0.15 = Mex$6.5b ÷ (Mex$50b - Mex$5.9b) (Based on the trailing twelve months to March 2021).

So, Megacable Holdings S. A. B. de C. V has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Media industry average of 9.5% it's much better.

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, you can check out the forecasts from the analysts covering Megacable Holdings S. A. B. de C. V here for free.

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

While the returns on capital are good, they haven't moved much. The company has employed 83% more capital in the last five years, and the returns on that capital have remained stable at 15%. Since 15% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

On a side note, Megacable Holdings S. A. B. de C. V has done well to reduce current liabilities to 12% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

Our Take On Megacable Holdings S. A. B. de C. V's ROCE

The main thing to remember is that Megacable Holdings S. A. B. de C. V has proven its ability to continually reinvest at respectable rates of return. However, over the last five years, the stock has only delivered a 7.0% return to shareholders who held over that period. That's why it could be worth your time looking into this stock further to discover if it has more traits of a multi-bagger.

Like most companies, Megacable Holdings S. A. B. de C. V does come with some risks, and we've found 1 warning sign that you should be aware of.

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