Yahoo Finance Here's What To Make Of Michelmersh Brick Holdings' (LON:MBH) Decelerating Rates Of Return
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Michelmersh Brick Holdings (LON:MBH) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
What is Return On Capital Employed (ROCE)?
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. Analysts use this formula to calculate it for Michelmersh Brick Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = UK£10m ÷ (UK£118m - UK£14m) (Based on the trailing twelve months to June 2021).
Therefore, Michelmersh Brick Holdings has an ROCE of 10.0%. On its own, that's a low figure but it's around the 11% average generated by the Basic Materials industry.
View our latest analysis for Michelmersh Brick Holdings
Above you can see how the current ROCE for Michelmersh Brick Holdings 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 Does the ROCE Trend For Michelmersh Brick Holdings Tell Us?
In terms of Michelmersh Brick Holdings' historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 10.0% for the last five years, and the capital employed within the business has risen 91% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
In Conclusion...
In summary, Michelmersh Brick Holdings has simply been reinvesting capital and generating the same low rate of return as before. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 196% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
One more thing to note, we've identified 1 warning sign with Michelmersh Brick Holdings and understanding this should be part of your investment process.
While Michelmersh Brick Holdings 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. 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.
