Mota-Engil SGPS (ELI:EGL) Is Experiencing Growth In Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Speaking of which, we noticed some great changes in Mota-Engil SGPS' (ELI:EGL) returns on capital, so let's have a look.

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

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 Mota-Engil SGPS, this is the formula:

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

0.13 = €397m ÷ (€7.7b - €4.7b) (Based on the trailing twelve months to December 2023).

Thus, Mota-Engil SGPS has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 11% generated by the Construction industry.

View our latest analysis for Mota-Engil SGPS

In the above chart we have measured Mota-Engil SGPS' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Mota-Engil SGPS .

What Can We Tell From Mota-Engil SGPS' ROCE Trend?

Mota-Engil SGPS is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 13%. Basically the business is earning more per dollar of capital invested and in addition to that, 50% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a side note, Mota-Engil SGPS' current liabilities are still rather high at 61% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Mota-Engil SGPS' ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Mota-Engil SGPS has. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 86% return over the last five years. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Mota-Engil SGPS does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

While Mota-Engil SGPS 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.