Here's What's Concerning About Marshall Monteagle (JSE:MMP)

What financial metrics can indicate to us that a company is maturing or even in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. On that note, looking into Marshall Monteagle (JSE:MMP), we weren't too upbeat about how things were going.

Understanding Return On Capital Employed (ROCE)

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 Marshall Monteagle is:

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

0.0071 = US$725k ÷ (US$131m - US$29m) (Based on the trailing twelve months to September 2020).

Therefore, Marshall Monteagle has an ROCE of 0.7%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 11%.

Check out our latest analysis for Marshall Monteagle

Historical performance is a great place to start when researching a stock so above you can see the gauge for Marshall Monteagle's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Marshall Monteagle, check out these free graphs here.

What Does the ROCE Trend For Marshall Monteagle Tell Us?

We are a bit worried about the trend of returns on capital at Marshall Monteagle. Unfortunately the returns on capital have diminished from the 9.7% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Marshall Monteagle to turn into a multi-bagger.

On a related note, Marshall Monteagle has decreased its current liabilities to 22% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Marshall Monteagle's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. In spite of that, the stock has delivered a 35% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you'd like to know more about Marshall Monteagle, we've spotted 2 warning signs, and 1 of them doesn't sit too well with us.

While Marshall Monteagle isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. 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.
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