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Returns On Capital Signal Tricky Times Ahead For MTR (HKG:66)

Simply Wall St ·  Oct 4, 2023 20:59

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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 MTR (HKG:66) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for MTR, this is the formula:

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

0.023 = HK$7.4b ÷ (HK$342b - HK$28b) (Based on the trailing twelve months to June 2023).

Therefore, MTR has an ROCE of 2.3%. In absolute terms, that's a low return and it also under-performs the Transportation industry average of 8.3%.

View our latest analysis for MTR

roce
SEHK:66 Return on Capital Employed October 5th 2023

In the above chart we have measured MTR'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 MTR here for free.

What Does the ROCE Trend For MTR Tell Us?

When we looked at the ROCE trend at MTR, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 2.3% from 4.9% five years ago. However it looks like MTR might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On MTR's ROCE

To conclude, we've found that MTR is reinvesting in the business, but returns have been falling. Since the stock has declined 13% 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.

MTR does have some risks though, and we've spotted 2 warning signs for MTR that you might be interested in.

While MTR 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.

Disclaimer: This content is for informational and educational purposes only and does not constitute a recommendation or endorsement of any specific investment or investment strategy. Read more
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