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If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. Although, when we looked at Mayville Engineering Company (NYSE:MEC), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What is it?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Mayville Engineering Company is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.026 = US$9.1m ÷ (US$443m - US$89m) (Based on the trailing twelve months to March 2022).
Therefore, Mayville Engineering Company has an ROCE of 2.6%. Ultimately, that's a low return and it under-performs the Machinery industry average of 9.9%.
See our latest analysis for Mayville Engineering Company
Above you can see how the current ROCE for Mayville Engineering Company compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Can We Tell From Mayville Engineering Company's ROCE Trend?
When we looked at the ROCE trend at Mayville Engineering Company, we didn't gain much confidence. Over the last four years, returns on capital have decreased to 2.6% from 6.2% four years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
In Conclusion...
While returns have fallen for Mayville Engineering Company in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 36% over the last three years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
On a final note, we've found 1 warning sign for Mayville Engineering Company that we think you should be aware of.