What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we’ll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. 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 ran our eye over Macfarlane Group’s (LON:MACF) trend of ROCE, we liked what we saw.
Understanding Return On Capital Employed (ROCE)
For those who don’t know, ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Macfarlane Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.14 = UK£22m ÷ (UK£231m – UK£67m) (Based on the trailing twelve months to June 2024).
Therefore, Macfarlane Group has an ROCE of 14%. By itself that’s a normal return on capital and it’s in line with the industry’s average returns of 14%.
Check out our latest analysis for Macfarlane Group
Above you can see how the current ROCE for Macfarlane Group 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 analyst report for Macfarlane Group .
What The Trend Of ROCE Can Tell Us
While the current returns on capital are decent, they haven’t changed much. Over the past five years, ROCE has remained relatively flat at around 14% and the business has deployed 67% more capital into its operations. Since 14% is a moderate ROCE though, it’s good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
On a side note, Macfarlane Group has done well to reduce current liabilities to 29% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.
The Key Takeaway
In the end, Macfarlane Group has proven its ability to adequately reinvest capital at good rates of return. In light of this, the stock has only gained 32% over the last five years for shareholders who have owned the stock in this period. That’s why it could be worth your time looking into this stock further to discover if it has more traits of a multi-bagger.
One more thing to note, we’ve identified 1 warning sign with Macfarlane Group and understanding it should be part of your investment process.
While Macfarlane Group may not currently earn the highest returns, we’ve compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
