We Think Morgan Advanced Materials (LON:MGAM) Might Have The DNA Of A Multi-Bagger
If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Speaking of which, we noticed some great changes in Morgan Advanced Materials' (LON:MGAM) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What Is It?
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 Morgan Advanced Materials is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.20 = UK£146m ÷ (UK£1.0b - UK£283m) (Based on the trailing twelve months to December 2022).
Thus, Morgan Advanced Materials has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Machinery industry average of 12%.
See our latest analysis for Morgan Advanced Materials
In the above chart we have measured Morgan Advanced Materials' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Morgan Advanced Materials here for free.
The Trend Of ROCE
Morgan Advanced Materials' ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 24% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.
In Conclusion...
In summary, we're delighted to see that Morgan Advanced Materials has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. So researching this company further and determining whether or not these trends will continue seems justified.
One final note, you should learn about the 2 warning signs we've spotted with Morgan Advanced Materials (including 1 which is a bit unpleasant) .
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
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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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