Morgan Sindall Group (LON:MGNS) Might Become A Compounding Machine
To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. So, when we ran our eye over Morgan Sindall Group's (LON:MGNS) trend of ROCE, we really liked what we saw.
What Is Return On Capital Employed (ROCE)?
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. 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)
0.20 = UK£123m ÷ (UK£1.8b - UK£1.2b) (Based on the trailing twelve months to December 2022).
Thus, Morgan Sindall Group has an ROCE of 20%. That's a fantastic return and not only that, it outpaces the average of 9.5% earned by companies in a similar industry.
Check out 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 to see what analysts are forecasting going forward, you should check out our free report for Morgan Sindall Group.
The Trend Of ROCE
It's hard not to be impressed by Morgan Sindall Group's returns on capital. The company has consistently earned 20% for the last five years, and the capital employed within the business has risen 67% in that time. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Morgan Sindall Group can keep this up, we'd be very optimistic about its future.
On a separate but related note, it's important to know that Morgan Sindall Group has a current liabilities to total assets ratio of 66%, which we'd consider pretty high. 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.
Our Take On Morgan Sindall Group's ROCE
In short, we'd argue Morgan Sindall Group has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. And since the stock has risen strongly over the last five years, it appears the market might expect this trend to continue. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
On a final note, we've found 3 warning signs for Morgan Sindall Group that we think you should be aware of.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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