Should You Be Impressed By Monbat AD's (BUL:5MB) Returns on Capital?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Monbat AD (BUL:5MB) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Monbat AD is:

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

0.059 = лв18m ÷ (лв466m - лв163m) (Based on the trailing twelve months to September 2020).

So, Monbat AD has an ROCE of 5.9%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 10%.

See our latest analysis for Monbat AD

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

So How Is Monbat AD's ROCE Trending?

When we looked at the ROCE trend at Monbat AD, we didn't gain much confidence. To be more specific, ROCE has fallen from 14% over the last five years. However it looks like Monbat AD 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.

On a side note, Monbat AD's current liabilities have increased over the last five years to 35% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

In Conclusion...

To conclude, we've found that Monbat AD is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 40% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Like most companies, Monbat AD does come with some risks, and we've found 2 warning signs 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. 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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