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To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Monadelphous Group (ASX:MND) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What Is It?
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 Monadelphous Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = AU$72m ÷ (AU$872m - AU$338m) (Based on the trailing twelve months to December 2023).
Therefore, Monadelphous Group has an ROCE of 13%. That's a relatively normal return on capital, and it's around the 15% generated by the Construction industry.
See our latest analysis for Monadelphous Group
Above you can see how the current ROCE for Monadelphous 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 analyst report for Monadelphous Group .
What Can We Tell From Monadelphous Group's ROCE Trend?
On the surface, the trend of ROCE at Monadelphous Group doesn't inspire confidence. Around five years ago the returns on capital were 20%, but since then they've fallen to 13%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.
The Bottom Line On Monadelphous Group's ROCE
Bringing it all together, while we're somewhat encouraged by Monadelphous Group's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 14% in the last five years. Therefore based on the analysis done in this article, we don't think Monadelphous Group has the makings of a multi-bagger.
Monadelphous Group does have some risks though, and we've spotted 1 warning sign for Monadelphous Group that you might be interested in.