Here's What's Concerning About Middleby's (NASDAQ:MIDD) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Middleby (NASDAQ:MIDD), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Middleby:

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

0.11 = US$657m ÷ (US$6.7b - US$938m) (Based on the trailing twelve months to October 2022).

Therefore, Middleby has an ROCE of 11%. By itself that's a normal return on capital and it's in line with the industry's average returns of 11%.

See our latest analysis for Middleby

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 to see what analysts are forecasting going forward, you should check out our free report for Middleby.

What Can We Tell From Middleby's ROCE Trend?

On the surface, the trend of ROCE at Middleby doesn't inspire confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 11%. 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.

The Bottom Line On Middleby'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 Middleby. These trends are starting to be recognized by investors since the stock has delivered a 7.7% 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.

Middleby does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is potentially serious...

While Middleby isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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.