Investors have encountered slowing returns on capital at MTN Group (JSE: MTN)


There are a few key trends to look for if we are to identify the next multi-bagger. A common approach is to try to find a business with Return on capital employed (ROCE) which increases, in line with growth amount capital employed. If you see this, it usually means it’s a company with a great business model and plenty of profitable reinvestment opportunities. To concern MTN Group (JSE: MTN) he has a high ROCE right now, but let’s see how the returns go.

What is Return on Employee Capital (ROCE)?

Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. To calculate this metric for MTN Group, here is the formula:

Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)

0.21 = R51b (R348b – R109b) (Based on the last twelve months up to June 2021).

Thereby, MTN Group has a ROCE of 21%. On its own, that’s a great ROCE, but it falls short of the 39% generated by the wireless industry.

See our latest analysis for MTN Group

JSE: Return on capital invested by MTN on October 15, 2021

Above you can see how MTN Group’s current ROCE compares to its previous returns on capital, but there is little you can say about the past. If you want, you can check out the analysts’ forecasts covering the MTN Group here for free.

So, what is the evolution of the ROCE of the MTN group?

Over the past five years, the ROCE and capital employed of MTN Group have both remained broadly stable. It is not uncommon to see this when looking at a mature, stable company that does not reinvest its profits because it is likely past this phase of the business cycle. While current yields are high, we would need more evidence of the underlying growth to make it look like multi-bagging going forward. With fewer investment opportunities, it makes sense that MTN Group paid a good 49% of its profits to shareholders. Unless companies have very good growth opportunities, they will generally return money to shareholders.

Our opinion on the ROCE of the MTN group

Although MTN Group has an impressive return on capital, it is not increasing this amount. Given that the stock has gained an impressive 65% over the past five years, investors must think there are better things to come. Ultimately, if the underlying trends persist, we won’t be holding our breath that this is multi-bagging in the future.

MTN Group does have some risks, however, and we have spotted 3 warning signs for MTN Group that might interest you.

If you want to look for other stocks that have generated high returns, check out this free list of stocks with strong balance sheets that also generate high returns on equity.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.

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