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There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Although, when we looked at Morgan Advanced Materials (LON:MGAM), it didn't seem to tick all of these boxes.
Understanding Return On Capital Employed (ROCE)
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. To calculate this metric for Morgan Advanced Materials, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.17 = UK£139m ÷ (UK£1.1b - UK£232m) (Based on the trailing twelve months to June 2024).
So, Morgan Advanced Materials has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 13% it's much better.
Check out our latest analysis for Morgan Advanced Materials
In the above chart we have measured Morgan Advanced Materials' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Morgan Advanced Materials .
The Trend Of ROCE
Things have been pretty stable at Morgan Advanced Materials, 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. So don't be surprised if Morgan Advanced Materials doesn't end up being a multi-bagger in a few years time. With fewer investment opportunities, it makes sense that Morgan Advanced Materials has been paying out a decent 37% of its earnings to shareholders. Given the business isn't reinvesting in itself, it makes sense to distribute a portion of earnings among shareholders.
In Conclusion...
In a nutshell, Morgan Advanced Materials has been trudging along with the same returns from the same amount of capital over the last five years. And with the stock having returned a mere 6.1% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.