Here's What To Make Of Macro Enterprises' (CVE:MCR) Returns On Capital
If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Macro Enterprises (CVE:MCR), it didn't seem to tick all of these boxes.
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. To calculate this metric for Macro Enterprises, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.089 = CA$13m ÷ (CA$210m - CA$64m) (Based on the trailing twelve months to June 2020).
Thus, Macro Enterprises has an ROCE of 8.9%. In absolute terms, that's a low return and it also under-performs the Energy Services industry average of 11%.
Check out our latest analysis for Macro Enterprises
Above you can see how the current ROCE for Macro Enterprises 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 report for Macro Enterprises.
What Does the ROCE Trend For Macro Enterprises Tell Us?
On the surface, the trend of ROCE at Macro Enterprises doesn't inspire confidence. Around five years ago the returns on capital were 15%, but since then they've fallen to 8.9%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
In Conclusion...
From the above analysis, we find it rather worrisome that returns on capital and sales for Macro Enterprises have fallen, meanwhile the business is employing more capital than it was five years ago. Investors must expect better things on the horizon though because the stock has risen 8.7% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.
One more thing to note, we've identified 2 warning signs with Macro Enterprises and understanding them should be part of your investment process.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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