What Do The Returns On Capital At Mitchells & Butlers (LON:MAB) Tell Us?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Mitchells & Butlers (LON:MAB) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper 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. To calculate this metric for Mitchells & Butlers, this is the formula:

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

0.061 = UK£258m ÷ (UK£4.9b - UK£684m) (Based on the trailing twelve months to April 2020).

So, Mitchells & Butlers has an ROCE of 6.1%. In absolute terms, that's a low return but it's around the Hospitality industry average of 6.8%.

View our latest analysis for Mitchells & Butlers

roce

Above you can see how the current ROCE for Mitchells & Butlers 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 Mitchells & Butlers here for free.

So How Is Mitchells & Butlers' ROCE Trending?

Over the past five years, Mitchells & Butlers' ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So unless we see a substantial change at Mitchells & Butlers in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

Our Take On Mitchells & Butlers' ROCE

In summary, Mitchells & Butlers isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Since the stock has declined 55% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with Mitchells & Butlers (including 1 which is is significant) .

While Mitchells & Butlers isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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