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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in MS INTERNATIONAL's (LON:MSI) returns on capital, so let's have a look.
What Is 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 MS INTERNATIONAL, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.21 = UK£13m ÷ (UK£129m - UK£64m) (Based on the trailing twelve months to April 2024).
Thus, MS INTERNATIONAL has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Aerospace & Defense industry average of 15%.
View our latest analysis for MS INTERNATIONAL
Historical performance is a great place to start when researching a stock so above you can see the gauge for MS INTERNATIONAL's ROCE against it's prior returns. If you'd like to look at how MS INTERNATIONAL has performed in the past in other metrics, you can view this free graph of MS INTERNATIONAL's past earnings, revenue and cash flow.
How Are Returns Trending?
The trends we've noticed at MS INTERNATIONAL are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 21%. The amount of capital employed has increased too, by 46%. So we're very much inspired by what we're seeing at MS INTERNATIONAL thanks to its ability to profitably reinvest capital.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 50% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.
The Key Takeaway
To sum it up, MS INTERNATIONAL has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.