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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? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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 ran our eye over Miller Industries' (NYSE:MLR) trend of ROCE, we liked what we saw.
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. The formula for this calculation on Miller Industries is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = US$39m ÷ (US$398m - US$111m) (Based on the trailing twelve months to December 2020).
So, Miller Industries has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 9.4% generated by the Machinery industry.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Miller Industries' ROCE against it's prior returns. If you'd like to look at how Miller Industries has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
So How Is Miller Industries' ROCE Trending?
While the returns on capital are good, they haven't moved much. Over the past five years, ROCE has remained relatively flat at around 13% and the business has deployed 65% more capital into its operations. Since 13% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
To sum it up, Miller Industries has simply been reinvesting capital steadily, at those decent rates of return. And long term investors would be thrilled with the 131% return they've received over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
If you're still interested in Miller Industries it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.
While Miller Industries 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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