- Auto Components
Returns on Capital Paint A Bright Future For MAHLE Metal Leve (BVMF:LEVE3)
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of MAHLE Metal Leve (BVMF:LEVE3) looks great, so lets see what the trend can tell us.
What Is 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. Analysts use this formula to calculate it for MAHLE Metal Leve:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.30 = R$636m ÷ (R$3.1b - R$1.0b) (Based on the trailing twelve months to December 2022).
Thus, MAHLE Metal Leve has an ROCE of 30%. In absolute terms that's a great return and it's even better than the Auto Components industry average of 6.9%.
View our latest analysis for MAHLE Metal Leve
Above you can see how the current ROCE for MAHLE Metal Leve compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What The Trend Of ROCE Can Tell Us
MAHLE Metal Leve's ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 65% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 33% of the business, which is more than it was five years ago. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.
In summary, we're delighted to see that MAHLE Metal Leve has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a solid 75% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if MAHLE Metal Leve can keep these trends up, it could have a bright future ahead.
One final note, you should learn about the 2 warning signs we've spotted with MAHLE Metal Leve (including 1 which is a bit concerning) .
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.
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Find out whether MAHLE Metal Leve is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.View the Free Analysis
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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.
MAHLE Metal Leve
MAHLE Metal Leve S.A. engages in the research, development, manufacturing, and sale of engine systems and components, filtration, and thermal management products worldwide.
Excellent balance sheet established dividend payer.