Returns Are Gaining Momentum At Martifer SGPS (ELI:MAR)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Speaking of which, we noticed some great changes in Martifer SGPS' (ELI:MAR) returns on capital, so let's have a 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. To calculate this metric for Martifer SGPS, this is the formula:

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

0.074 = €12m ÷ (€270m - €113m) (Based on the trailing twelve months to December 2020).

Therefore, Martifer SGPS has an ROCE of 7.4%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 10%.

Check out our latest analysis for Martifer SGPS

Historical performance is a great place to start when researching a stock so above you can see the gauge for Martifer SGPS' ROCE against it's prior returns. If you're interested in investigating Martifer SGPS' past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

It's great to see that Martifer SGPS has started to generate some pre-tax earnings from prior investments. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 7.4% on their capital employed. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 52%. This could potentially mean that the company is selling some of its assets.

Another thing to note, Martifer SGPS has a high ratio of current liabilities to total assets of 42%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Martifer SGPS' ROCE

In the end, Martifer SGPS has proven it's capital allocation skills are good with those higher returns from less amount of capital. Since the stock has returned a staggering 122% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a final note, we found 3 warning signs for Martifer SGPS (1 can't be ignored) you should be aware of.

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.

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