Yahoo Finance Be Wary Of Marshalls (LON:MSLH) And Its Returns On Capital
To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. In light of that, when we looked at Marshalls (LON:MSLH) and its ROCE trend, we weren't exactly thrilled.
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 Marshalls is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.057 = UK£26m ÷ (UK£614m - UK£157m) (Based on the trailing twelve months to December 2020).
Thus, Marshalls has an ROCE of 5.7%. In absolute terms, that's a low return and it also under-performs the Basic Materials industry average of 7.4%.
View our latest analysis for Marshalls
Above you can see how the current ROCE for Marshalls compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
The Trend Of ROCE
When we looked at the ROCE trend at Marshalls, we didn't gain much confidence. To be more specific, ROCE has fallen from 15% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
The Bottom Line On Marshalls' ROCE
We're a bit apprehensive about Marshalls because despite more capital being deployed in the business, returns on that capital and sales have both fallen. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 164%. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.
Marshalls does have some risks, we noticed 4 warning signs (and 1 which doesn't sit too well with us) we think you should know about.
While Marshalls 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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