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Returns On Capital Signal Tricky Times Ahead For MAAS Group Holdings (ASX:MGH)

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What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think MAAS Group Holdings (ASX:MGH) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on MAAS Group Holdings is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.082 = AU$50m ÷ (AU$708m - AU$102m) (Based on the trailing twelve months to December 2021).

Therefore, MAAS Group Holdings has an ROCE of 8.2%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 13%.

View our latest analysis for MAAS Group Holdings

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Above you can see how the current ROCE for MAAS Group Holdings 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 MAAS Group Holdings.

What Does the ROCE Trend For MAAS Group Holdings Tell Us?

In terms of MAAS Group Holdings' historical ROCE movements, the trend isn't fantastic. Around three years ago the returns on capital were 14%, but since then they've fallen to 8.2%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, MAAS Group Holdings has decreased its current liabilities to 14% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From MAAS Group Holdings' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that MAAS Group Holdings is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 10% in the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

MAAS Group Holdings does have some risks, we noticed 2 warning signs (and 1 which is significant) we think you should know about.

While MAAS Group Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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.