We Like These Underlying Return On Capital Trends At Major Drilling Group International (TSE:MDI)
There are a few key trends to look for if we want to identify the next multi-bagger. 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. So on that note, Major Drilling Group International (TSE:MDI) looks quite promising in regards to its trends of return on capital.
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 Major Drilling Group International is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = CA$96m ÷ (CA$619m - CA$112m) (Based on the trailing twelve months to October 2023).
So, Major Drilling Group International has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 2.6% generated by the Metals and Mining industry.
Check out our latest analysis for Major Drilling Group International
Above you can see how the current ROCE for Major Drilling Group International 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 Major Drilling Group International here for free.
What Does the ROCE Trend For Major Drilling Group International Tell Us?
The fact that Major Drilling Group International is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 19% on its capital. In addition to that, Major Drilling Group International is employing 25% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
Our Take On Major Drilling Group International's ROCE
To the delight of most shareholders, Major Drilling Group International has now broken into profitability. And with a respectable 77% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Major Drilling Group International can keep these trends up, it could have a bright future ahead.
One more thing to note, we've identified 1 warning sign with Major Drilling Group International and understanding this should be part of your investment process.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.
