What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. So on that note, MasterBrand (NYSE:MBC) looks quite promising in regards to its trends of return on capital.
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 MasterBrand is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = US$309m ÷ (US$2.4b - US$349m) (Based on the trailing twelve months to December 2023).
Therefore, MasterBrand has an ROCE of 15%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Building industry average of 17%.
Check out our latest analysis for MasterBrand
Above you can see how the current ROCE for MasterBrand compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for MasterBrand .
What Can We Tell From MasterBrand's ROCE Trend?
MasterBrand is showing promise given that its ROCE is trending up and to the right. More specifically, while the company has kept capital employed relatively flat over the last three years, the ROCE has climbed 73% in that same time. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
The Bottom Line On MasterBrand's ROCE
To bring it all together, MasterBrand has done well to increase the returns it's generating from its capital employed. And a remarkable 127% total return over the last year tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
Like most companies, MasterBrand does come with some risks, and we've found 1 warning sign that you should be aware of.
While MasterBrand 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.
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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.
