MilDef Group (STO:MILDEF) May Have Issues Allocating Its Capital

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at MilDef Group (STO:MILDEF) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on MilDef Group is:

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

0.029 = kr20m ÷ (kr814m - kr131m) (Based on the trailing twelve months to March 2022).

Therefore, MilDef Group has an ROCE of 2.9%. Ultimately, that's a low return and it under-performs the Aerospace & Defense industry average of 6.2%.

Check out our latest analysis for MilDef Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for MilDef Group's ROCE against it's prior returns. If you'd like to look at how MilDef Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

On the surface, the trend of ROCE at MilDef Group doesn't inspire confidence. Over the last two years, returns on capital have decreased to 2.9% from 18% two years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, MilDef Group has done well to pay down its current liabilities to 16% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On MilDef Group's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for MilDef Group. And the stock has followed suit returning a meaningful 92% to shareholders over the last year. So should these growth trends continue, we'd be optimistic on the stock going forward.

MilDef Group does have some risks though, and we've spotted 2 warning signs for MilDef Group that you might be interested in.

While MilDef Group 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.

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.