What are the early trends we should look for to identify a stock that could 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Matthews International (NASDAQ:MATW) and its ROCE trend, we weren't exactly thrilled.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Matthews International is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.053 = US$92m ÷ (US$2.1b - US$324m) (Based on the trailing twelve months to March 2021).
Therefore, Matthews International has an ROCE of 5.3%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 7.4%.
In the above chart we have measured Matthews International's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Matthews International here for free.
What Does the ROCE Trend For Matthews International Tell Us?
There hasn't been much to report for Matthews International's returns and its level of capital employed because both metrics have been steady for the past five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if Matthews International doesn't end up being a multi-bagger in a few years time.
We can conclude that in regards to Matthews International's returns on capital employed and the trends, there isn't much change to report on. Since the stock has declined 22% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.
One more thing, we've spotted 4 warning signs facing Matthews International that you might find interesting.
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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