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What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Morgan Sindall Group (LON:MGNS) looks quite promising in regards to its trends of return on capital.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Morgan Sindall Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = UK£85m ÷ (UK£1.4b - UK£918m) (Based on the trailing twelve months to December 2019).
So, Morgan Sindall Group has an ROCE of 18%. That's a relatively normal return on capital, and it's around the 16% generated by the Construction industry.
See our latest analysis for Morgan Sindall Group
Above you can see how the current ROCE for Morgan Sindall Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Morgan Sindall Group here for free.
What The Trend Of ROCE Can Tell Us
Investors would be pleased with what's happening at Morgan Sindall Group. Over the last five years, returns on capital employed have risen substantially to 18%. Basically the business is earning more per dollar of capital invested and in addition to that, 34% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
Another thing to note, Morgan Sindall Group has a high ratio of current liabilities to total assets of 66%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
In Conclusion...
All in all, it's terrific to see that Morgan Sindall Group is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a solid 53% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Morgan Sindall Group can keep these trends up, it could have a bright future ahead.