Yahoo Finance Marine Products (NYSE:MPX) Will Want To Turn Around Its Return Trends
To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Marine Products (NYSE:MPX), they do have a high ROCE, but we weren't exactly elated from how returns are trending.
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. Analysts use this formula to calculate it for Marine Products:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.23 = US$40m ÷ (US$204m - US$32m) (Based on the trailing twelve months to March 2024).
So, Marine Products has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Leisure industry average of 13%.
Check out our latest analysis for Marine Products
Above you can see how the current ROCE for Marine Products compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Marine Products .
What The Trend Of ROCE Can Tell Us
When we looked at the ROCE trend at Marine Products, we didn't gain much confidence. Historically returns on capital were even higher at 42%, but they have dropped over the last five years. 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.
The Key Takeaway
In summary, we're somewhat concerned by Marine Products' diminishing returns on increasing amounts of capital. And long term shareholders have watched their investments stay flat over the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
One more thing: We've identified 2 warning signs with Marine Products (at least 1 which is potentially serious) , and understanding these would certainly be useful.
Marine Products is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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.
