Here's What MSC Industrial Direct's (NYSE:MSM) Strong Returns On Capital Mean

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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, when we ran our eye over MSC Industrial Direct's (NYSE:MSM) trend of ROCE, we really liked what we saw.

What Is 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. To calculate this metric for MSC Industrial Direct, this is the formula:

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

0.22 = US$433m ÷ (US$2.6b - US$620m) (Based on the trailing twelve months to May 2022).

Thus, MSC Industrial Direct has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Trade Distributors industry average of 15%.

See our latest analysis for MSC Industrial Direct

In the above chart we have measured MSC Industrial Direct's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From MSC Industrial Direct's ROCE Trend?

MSC Industrial Direct deserves to be commended in regards to it's returns. The company has consistently earned 22% for the last five years, and the capital employed within the business has risen 31% in that time. Now considering ROCE is an attractive 22%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If MSC Industrial Direct can keep this up, we'd be very optimistic about its future.

In Conclusion...

MSC Industrial Direct has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. Therefore it's no surprise that shareholders have earned a respectable 65% return if they held over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

One more thing, we've spotted 2 warning signs facing MSC Industrial Direct that you might find interesting.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.