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To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at the ROCE trend of Marks Electrical Group (LON:MRK) we really liked what we saw.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Marks Electrical Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.39 = UK£5.9m ÷ (UK£33m - UK£18m) (Based on the trailing twelve months to March 2023).
So, Marks Electrical Group has an ROCE of 39%. That's a fantastic return and not only that, it outpaces the average of 12% earned by companies in a similar industry.
View our latest analysis for Marks Electrical Group
Above you can see how the current ROCE for Marks Electrical Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Marks Electrical Group here for free.
How Are Returns Trending?
We like the trends that we're seeing from Marks Electrical Group. The data shows that returns on capital have increased substantially over the last four years to 39%. Basically the business is earning more per dollar of capital invested and in addition to that, 134% more capital is being employed now too. So we're very much inspired by what we're seeing at Marks Electrical Group thanks to its ability to profitably reinvest capital.
Another thing to note, Marks Electrical Group has a high ratio of current liabilities to total assets of 54%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
In Conclusion...
All in all, it's terrific to see that Marks Electrical Group is reaping the rewards from prior investments and is growing its capital base. And with a respectable 28% awarded to those who held the stock over the last year, you could argue that these developments are starting to get the attention they deserve. 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.