What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Mulberry Group (LON:MUL) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Understanding 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. To calculate this metric for Mulberry Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.09 = UK£7.4m ÷ (UK£120m - UK£37m) (Based on the trailing twelve months to March 2021).
Therefore, Mulberry Group has an ROCE of 9.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 9.0%.
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Mulberry Group's past further, check out this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
Things have been pretty stable at Mulberry Group, with its capital employed and returns on that capital staying somewhat the same for the last five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if Mulberry Group doesn't end up being a multi-bagger in a few years time.
Our Take On Mulberry Group's ROCE
In summary, Mulberry Group isn't compounding its earnings but is generating stable returns on the same amount of capital employed. It seems that investors have little hope of these trends getting any better and that may have partly contributed to the stock collapsing 70% in the last five years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.
If you'd like to know about the risks facing Mulberry Group, we've discovered 2 warning signs that you should be aware of.
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.
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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