Slowing Rates Of Return At Mota-Engil SGPS (ELI:EGL) Leave Little Room For Excitement

There are a few key trends to look for if we want to identify the next 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Mota-Engil SGPS (ELI:EGL) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is 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. The formula for this calculation on Mota-Engil SGPS is:

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

0.099 = €244m ÷ (€5.8b - €3.4b) (Based on the trailing twelve months to December 2022).

Thus, Mota-Engil SGPS has an ROCE of 9.9%. Even though it's in line with the industry average of 10.0%, it's still a low return by itself.

See 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'd like to see what analysts are forecasting going forward, you should check out our free report for Mota-Engil SGPS.

The Trend Of ROCE

There are better returns on capital out there than what we're seeing at Mota-Engil SGPS. Over the past five years, ROCE has remained relatively flat at around 9.9% and the business has deployed 25% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

On a side note, Mota-Engil SGPS' current liabilities are still rather high at 58% 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

Long story short, while Mota-Engil SGPS has been reinvesting its capital, the returns that it's generating haven't increased. And in the last five years, the stock has given away 41% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

On a final note, we found 3 warning signs for Mota-Engil SGPS (1 doesn't sit too well with us) you should be aware of.

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.