If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Mistras Group's (NYSE:MG) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What Is It?
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. Analysts use this formula to calculate it for Mistras Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.091 = US$39m ÷ (US$548m - US$115m) (Based on the trailing twelve months to June 2024).
So, Mistras Group has an ROCE of 9.1%. Ultimately, that's a low return and it under-performs the Professional Services industry average of 14%.
In the above chart we have measured Mistras Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Mistras Group for free.
What Does the ROCE Trend For Mistras Group Tell Us?
You'd find it hard not to be impressed with the ROCE trend at Mistras Group. The data shows that returns on capital have increased by 108% over the trailing five years. The company is now earning US$0.09 per dollar of capital employed. Speaking of capital employed, the company is actually utilizing 30% less than it was five years ago, which can be indicative of a business that's improving its efficiency. Mistras Group may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
The Bottom Line
In summary, it's great to see that Mistras Group has been able to turn things around and earn higher returns on lower amounts of capital. And since the stock has fallen 22% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.
On a separate note, we've found 2 warning signs for Mistras Group you'll probably want to know about.
While Mistras Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.