Yahoo Finance Martinrea International (TSE:MRE) Is Reinvesting At Lower Rates Of Return
If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Martinrea International (TSE:MRE) 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?
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 Martinrea International:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.085 = CA$230m ÷ (CA$4.1b - CA$1.4b) (Based on the trailing twelve months to December 2022).
So, Martinrea International has an ROCE of 8.5%. In absolute terms, that's a low return but it's around the Auto Components industry average of 8.8%.
View our latest analysis for Martinrea International
Above you can see how the current ROCE for Martinrea International 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 Martinrea International.
What The Trend Of ROCE Can Tell Us
In terms of Martinrea International's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 8.5% from 14% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
Our Take On Martinrea International's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Martinrea International is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 1.4% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.
If you want to continue researching Martinrea International, you might be interested to know about the 1 warning sign that our analysis has discovered.
While Martinrea International may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.
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