Murray & Roberts Holdings (JSE:MUR) Is Very Good At Capital Allocation

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Did you know there are some financial metrics that can provide clues of a potential 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at the ROCE trend of Murray & Roberts Holdings (JSE:MUR) we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for Murray & Roberts Holdings:

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

0.25 = R767m ÷ (R8.9b - R5.9b) (Based on the trailing twelve months to December 2022).

Thus, Murray & Roberts Holdings has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Construction industry average of 11%.

View our latest analysis for Murray & Roberts Holdings

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JSE:MUR Return on Capital Employed August 28th 2023

Above you can see how the current ROCE for Murray & Roberts Holdings 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 report for Murray & Roberts Holdings.

How Are Returns Trending?

We're pretty happy with how the ROCE has been trending at Murray & Roberts Holdings. The data shows that returns on capital have increased by 198% over the trailing five years. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Speaking of capital employed, the company is actually utilizing 56% less than it was five years ago, which can be indicative of a business that's improving its efficiency. Murray & Roberts Holdings may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 66% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.