Why The 25% Return On Capital At MTN Group (JSE:MTN) Should Have Your Attention

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, the ROCE of MTN Group (JSE:MTN) looks great, so lets see what the trend can tell us.

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. Analysts use this formula to calculate it for MTN Group:

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

0.25 = R59b ÷ (R374b - R137b) (Based on the trailing twelve months to June 2022).

Therefore, MTN Group has an ROCE of 25%. By itself, that's a great ROCE but it falls short of the 41% generated by the Wireless Telecom industry.

Our analysis indicates that MTN is potentially undervalued!

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, you can check out the forecasts from the analysts covering MTN Group here for free.

What Does the ROCE Trend For MTN Group Tell Us?

MTN Group is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 25%. The amount of capital employed has increased too, by 28%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

The Bottom Line

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what MTN Group has. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 33% to shareholders. So with that in mind, we think the stock deserves further research.

While MTN Group looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether MTN is currently trading for a fair price.

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.