If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, MasterBrand (NYSE:MBC) looks quite promising in regards to its trends of return on capital.
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 MasterBrand:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = US$317m ÷ (US$2.4b - US$368m) (Based on the trailing twelve months to September 2023).
Therefore, MasterBrand has an ROCE of 16%. That's a pretty standard return and it's in line with the industry average of 16%.
View our latest analysis for MasterBrand
In the above chart we have measured MasterBrand'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 MasterBrand.
What Does the ROCE Trend For MasterBrand Tell Us?
MasterBrand has not disappointed in regards to ROCE growth. We found that the returns on capital employed over the last two years have risen by 74%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Interestingly, the business may be becoming more efficient because it's applying 22% less capital than it was two years ago. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.
The Bottom Line
In the end, MasterBrand has proven it's capital allocation skills are good with those higher returns from less amount of capital. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 59% return over the last year. Therefore, we think it would be worth your time to check if these trends are going to continue.
MasterBrand does have some risks though, and we've spotted 2 warning signs for MasterBrand that you might be interested in.
While MasterBrand isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.
About NYSE:MBC
MasterBrand
Engages in the manufacture and sale of residential cabinets in the United States and Canada.
Good value with mediocre balance sheet.
