Here's What To Make Of MTN Group's (JSE:MTN) Decelerating Rates Of Return

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. Although, when we looked at MTN Group (JSE:MTN), it didn't seem to tick all of these boxes.

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. The formula for this calculation on MTN Group is:

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

0.20 = R48b ÷ (R349b - R109b) (Based on the trailing twelve months to December 2020).

So, MTN Group has an ROCE of 20%. In isolation, that's a pretty standard return but against the Wireless Telecom industry average of 27%, it's not as good.

View our latest analysis for MTN Group

In the above chart we have measured MTN Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for MTN Group.

How Are Returns Trending?

Things have been pretty stable at MTN Group, with its capital employed and returns on that capital staying somewhat the same for the last five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect MTN Group to be a multi-bagger going forward. This probably explains why MTN Group is paying out 51% of its income to shareholders in the form of dividends. Given the business isn't reinvesting in itself, it makes sense to distribute a portion of earnings among shareholders.

Our Take On MTN Group's ROCE

In a nutshell, MTN Group has been trudging along with the same returns from the same amount of capital over the last five years. Since the stock has declined 20% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think MTN Group has the makings of a multi-bagger.

One more thing, we've spotted 3 warning signs facing MTN Group that you might find interesting.

While MTN Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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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