Returns On Capital At Mayville Engineering Company (NYSE:MEC) Have Stalled

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Mayville Engineering Company (NYSE:MEC) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Mayville Engineering Company is:

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

0.062 = US$22m ÷ (US$448m - US$96m) (Based on the trailing twelve months to March 2023).

So, Mayville Engineering Company has an ROCE of 6.2%. Ultimately, that's a low return and it under-performs the Machinery industry average of 11%.

View our latest analysis for Mayville Engineering Company

Above you can see how the current ROCE for Mayville Engineering Company 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 Mayville Engineering Company here for free.

What Does the ROCE Trend For Mayville Engineering Company Tell Us?

In terms of Mayville Engineering Company's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 6.2% for the last five years, and the capital employed within the business has risen 71% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Bottom Line On Mayville Engineering Company's ROCE

In summary, Mayville Engineering Company has simply been reinvesting capital and generating the same low rate of return as before. Although the market must be expecting these trends to improve because the stock has gained 92% over the last three years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Like most companies, Mayville Engineering Company does come with some risks, and we've found 1 warning sign that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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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