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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at MAV Beauty Brands (TSE:MAV) and its ROCE trend, we weren't exactly thrilled.
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. The formula for this calculation on MAV Beauty Brands is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.051 = US$21m ÷ (US$423m - US$16m) (Based on the trailing twelve months to March 2021).
So, MAV Beauty Brands has an ROCE of 5.1%. Ultimately, that's a low return and it under-performs the Personal Products industry average of 12%.
Above you can see how the current ROCE for MAV Beauty Brands 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 MAV Beauty Brands.
What Can We Tell From MAV Beauty Brands' ROCE Trend?
In terms of MAV Beauty Brands' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 7.4% over the last four years. However it looks like MAV Beauty Brands might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
Our Take On MAV Beauty Brands' ROCE
Bringing it all together, while we're somewhat encouraged by MAV Beauty Brands' reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 70% over the last three years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think MAV Beauty Brands has the makings of a multi-bagger.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for MAV Beauty Brands (of which 1 can't be ignored!) that you should know about.
While MAV Beauty Brands 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.
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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