Should You Be Impressed By MasterCraft Boat Holdings' (NASDAQ:MCFT) Returns on Capital?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Looking at MasterCraft Boat Holdings (NASDAQ:MCFT), it does have a high ROCE right now, but lets see how returns are trending.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for MasterCraft Boat Holdings:

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

0.21 = US$32m ÷ (US$211m - US$61m) (Based on the trailing twelve months to October 2020).

Therefore, MasterCraft Boat Holdings has an ROCE of 21%. In absolute terms that's a very respectable return and compared to the Leisure industry average of 19% it's pretty much on par.

See our latest analysis for MasterCraft Boat Holdings

Above you can see how the current ROCE for MasterCraft Boat Holdings 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 report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at MasterCraft Boat Holdings, we didn't gain much confidence. While it's comforting that the ROCE is high, five years ago it was 31%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

Our Take On MasterCraft Boat Holdings' ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for MasterCraft Boat Holdings have fallen, meanwhile the business is employing more capital than it was five years ago. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 118%. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a separate note, we've found 1 warning sign for MasterCraft Boat Holdings you'll probably want to know about.

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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