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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Michelmersh Brick Holdings' (LON:MBH) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What Is It?
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 Michelmersh Brick Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = UK£12m ÷ (UK£124m - UK£15m) (Based on the trailing twelve months to December 2023).
Thus, Michelmersh Brick Holdings has an ROCE of 11%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Basic Materials industry average of 9.7%.
Check out our latest analysis for Michelmersh Brick Holdings
In the above chart we have measured Michelmersh Brick Holdings' 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 Michelmersh Brick Holdings for free.
What The Trend Of ROCE Can Tell Us
Michelmersh Brick Holdings is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 11%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 24%. So we're very much inspired by what we're seeing at Michelmersh Brick Holdings thanks to its ability to profitably reinvest capital.
What We Can Learn From Michelmersh Brick Holdings' ROCE
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 Michelmersh Brick Holdings has. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 36% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.
If you'd like to know about the risks facing Michelmersh Brick Holdings, we've discovered 1 warning sign that you should be aware of.