Stock Analysis

Capital Allocation Trends At Middleby (NASDAQ:MIDD) Aren't Ideal

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NasdaqGS:MIDD
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If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Middleby (NASDAQ:MIDD), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

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 Middleby is:

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

0.11 = US$563m ÷ (US$5.8b - US$823m) (Based on the trailing twelve months to October 2021).

So, Middleby has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 10% generated by the Machinery industry.

View our latest analysis for Middleby

roce
NasdaqGS:MIDD Return on Capital Employed December 6th 2021

In the above chart we have measured Middleby's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Middleby here for free.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Middleby, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 11% from 18% five 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.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Middleby is reinvesting for growth and has higher sales as a result. These trends are starting to be recognized by investors since the stock has delivered a 21% gain to shareholders who've held over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

On a separate note, we've found 1 warning sign for Middleby you'll probably want to know about.

While Middleby 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.

What are the risks and opportunities for Middleby?

The Middleby Corporation designs, manufactures, markets, distributes, and services a range of foodservice, food processing, and residential kitchen equipment in the United States, Canada, Asia, Europe, the Middle East, and Latin America.

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Rewards

  • Trading at 18.5% below our estimate of its fair value

  • Earnings are forecast to grow 9.46% per year

Risks

  • Debt is not well covered by operating cash flow

  • Significant insider selling over the past 3 months

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