Can Morgan Sindall Group (LON:MGNS) Continue To Grow Its Returns On Capital?

Simply Wall St
·3 min read

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. So on that note, Morgan Sindall Group (LON:MGNS) looks quite promising in regards to its trends of return on capital.

Understanding 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. Analysts use this formula to calculate it for Morgan Sindall Group:

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

0.14 = UK£67m ÷ (UK£1.4b - UK£890m) (Based on the trailing twelve months to June 2020).

Therefore, Morgan Sindall Group has an ROCE of 14%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Construction industry average of 12%.

View our latest analysis for Morgan Sindall Group

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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.

So How Is Morgan Sindall Group's ROCE Trending?

The trends we've noticed at Morgan Sindall Group are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 14%. Basically the business is earning more per dollar of capital invested and in addition to that, 31% more capital is being employed now too. So we're very much inspired by what we're seeing at Morgan Sindall Group thanks to its ability to profitably reinvest capital.

On a side note, Morgan Sindall Group's current liabilities are still rather high at 65% of total assets. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Morgan Sindall Group's ROCE

In summary, it's great to see that Morgan Sindall Group can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a staggering 152% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Morgan Sindall Group can keep these trends up, it could have a bright future ahead.

One more thing to note, we've identified 3 warning signs with Morgan Sindall Group and understanding these 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.

This article by Simply Wall St is general in nature. 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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