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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think MJ Gleeson (LON:GLE) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for MJ Gleeson, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.053 = UK£12m ÷ (UK£287m - UK£53m) (Based on the trailing twelve months to December 2020).
So, MJ Gleeson has an ROCE of 5.3%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 7.2%.
View our latest analysis for MJ Gleeson
In the above chart we have measured MJ Gleeson'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 MJ Gleeson.
The Trend Of ROCE
The trend of ROCE doesn't look fantastic because it's fallen from 21% five years ago, while the business's capital employed increased by 65%. That being said, MJ Gleeson raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. MJ Gleeson probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.
The Bottom Line On MJ Gleeson's ROCE
We're a bit apprehensive about MJ Gleeson because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Yet despite these concerning fundamentals, the stock has performed strongly with a 61% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.
If you'd like to know about the risks facing MJ Gleeson, we've discovered 2 warning signs that you should be aware of.