There are a few key trends to look for if we want to identify the next multi-bagger. 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. However, after investigating Macauto Industrial (GTSM:9951), we don’t think it’s current trends fit the mold of a multi-bagger.
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. The formula for this calculation on Macauto Industrial is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.16 = NT$513m ÷ (NT$4.9b – NT$1.7b) (Based on the trailing twelve months to June 2020).
Thus, Macauto Industrial has an ROCE of 16%. On its own, that’s a standard return, however it’s much better than the 5.4% generated by the Auto Components industry.
In the above chart we have measured Macauto Industrial’s prior ROCE against its prior performance, but the future is arguably more important. If you’d like to see what analysts are forecasting going forward, you should check out our free report for Macauto Industrial.
What The Trend Of ROCE Can Tell Us
When we looked at the ROCE trend at Macauto Industrial, we didn’t gain much confidence. Over the last five years, returns on capital have decreased to 16% from 26% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven’t increased.
In summary, we’re somewhat concerned by Macauto Industrial’s diminishing returns on increasing amounts of capital. Investors haven’t taken kindly to these developments, since the stock has declined 30% from where it was five years ago. With underlying trends that aren’t great in these areas, we’d consider looking elsewhere.
Macauto Industrial does have some risks though, and we’ve spotted 1 warning sign for Macauto Industrial that you might be interested in.
While Macauto Industrial isn’t earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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