Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, while the ROCE is currently high for MultiChoice Group (JSE:MCG), we aren't jumping out of our chairs because returns are decreasing.
What is Return On Capital Employed (ROCE)?
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 MultiChoice Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.44 = R10b ÷ (R42b - R19b) (Based on the trailing twelve months to March 2021).
Therefore, MultiChoice Group has an ROCE of 44%. In absolute terms that's a great return and it's even better than the Media industry average of 8.8%.
Check out our latest analysis for MultiChoice Group
Above you can see how the current ROCE for MultiChoice Group 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 MultiChoice Group.
What The Trend Of ROCE Can Tell Us
There hasn't been much to report for MultiChoice Group's returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So while the current operations are delivering respectable returns, unless capital employed increases we'd be hard-pressed to believe it's a multi-bagger going forward. On top of that you'll notice that MultiChoice Group has been paying out a large portion (76%) of earnings in the form of dividends to shareholders. If the company is in fact lacking growth opportunities, that's one of the viable alternatives for the money.
On a separate but related note, it's important to know that MultiChoice Group has a current liabilities to total assets ratio of 44%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
In Conclusion...
While MultiChoice Group has impressive profitability from its capital, it isn't increasing that amount of capital. And investors may be recognizing these trends since the stock has only returned a total of 3.3% to shareholders over the last year. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
On a separate note, we've found 1 warning sign for MultiChoice Group 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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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.
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About JSE:MCG
MultiChoice Group
Through its subsidiaries, operates video-entertainment subscriber platforms in South Africa, rest of Africa, Europe, and internationally.
High growth potential and fair value.
