Be Wary Of Mativ Holdings (NYSE:MATV) And Its Returns On Capital
To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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 investigating Mativ Holdings (NYSE:MATV), we don't think it's current trends fit the mold of a multi-bagger.
What Is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Mativ Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.037 = US$117m ÷ (US$3.7b - US$466m) (Based on the trailing twelve months to December 2022).
So, Mativ Holdings has an ROCE of 3.7%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 11%.
See our latest analysis for Mativ Holdings
Above you can see how the current ROCE for Mativ Holdings 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 Mativ Holdings here for free.
The Trend Of ROCE
On the surface, the trend of ROCE at Mativ Holdings doesn't inspire confidence. To be more specific, ROCE has fallen from 9.5% over the last five years. 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.
The Key Takeaway
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Mativ Holdings. However, despite the promising trends, the stock has fallen 34% over the last five years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.
Mativ Holdings does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those are concerning...
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.
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