If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. With that in mind, we've noticed some promising trends at MGP Ingredients (NASDAQ:MGPI) so let's look a bit deeper.
What is 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. Analysts use this formula to calculate it for MGP Ingredients:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.17 = US$53m ÷ (US$357m - US$39m) (Based on the trailing twelve months to June 2020).
So, MGP Ingredients has an ROCE of 17%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Beverage industry average of 14%.
Above you can see how the current ROCE for MGP Ingredients 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 MGP Ingredients here for free.
What The Trend Of ROCE Can Tell Us
Investors would be pleased with what's happening at MGP Ingredients. Over the last five years, returns on capital employed have risen substantially to 17%. Basically the business is earning more per dollar of capital invested and in addition to that, 123% more capital is being employed now too. So we're very much inspired by what we're seeing at MGP Ingredients thanks to its ability to profitably reinvest capital.
To sum it up, MGP Ingredients has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 173% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if MGP Ingredients can keep these trends up, it could have a bright future ahead.
On a separate note, we've found 1 warning sign for MGP Ingredients you'll probably want to know about.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email email@example.com.