MRC Global (NYSE:MRC) Is Looking To Continue Growing Its Returns On Capital

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in MRC Global's (NYSE:MRC) returns on capital, so let's have a look.

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

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. To calculate this metric for MRC Global, this is the formula:

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

0.0016 = US$2.0m ÷ (US$1.7b - US$440m) (Based on the trailing twelve months to September 2021).

Therefore, MRC Global has an ROCE of 0.2%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 12%.

Check out our latest analysis for MRC Global

Above you can see how the current ROCE for MRC Global compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for MRC Global.

The Trend Of ROCE

It's great to see that MRC Global has started to generate some pre-tax earnings from prior investments. The company was generating losses five years ago, but now it's turned around, earning 0.2% which is no doubt a relief for some early shareholders. In regards to capital employed, MRC Global is using 32% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. MRC Global could be selling under-performing assets since the ROCE is improving.

Our Take On MRC Global's ROCE

In the end, MRC Global has proven it's capital allocation skills are good with those higher returns from less amount of capital. Astute investors may have an opportunity here because the stock has declined 69% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.

On a final note, we've found 1 warning sign for MRC Global that we think you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.