Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. Having said that, from a first glance at MDC Partners (NASDAQ:MDCA) 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 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 MDC Partners, this is the formula:

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

0.097 = US$98m ÷ (US$1.7b - US$689m) (Based on the trailing twelve months to September 2020).

Thus, MDC Partners has an ROCE of 9.7%. On its own, that's a low figure but it's around the 9.2% average generated by the Media industry.

View our latest analysis for MDC Partners

Historical performance is a great place to start when researching a stock so above you can see the gauge for MDC Partners' ROCE against it's prior returns. If you're interested in investigating MDC Partners' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For MDC Partners Tell Us?

In terms of MDC Partners' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 14%, but since then they've fallen to 9.7%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, MDC Partners has decreased its current liabilities to 40% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Keep in mind 40% is still pretty high, so those risks are still somewhat prevalent.

In Conclusion...

We're a bit apprehensive about MDC Partners because despite more capital being deployed in the business, returns on that capital and sales have both fallen. This could explain why the stock has sunk a total of 80% in the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

MDC Partners does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those shouldn't be ignored...

While MDC Partners 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.

This article by Simply Wall St is general in nature. 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.

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