Mene (CVE:MENE) Shareholders Will Want The ROCE Trajectory To Continue

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. With that in mind, we've noticed some promising trends at Mene (CVE:MENE) so let's look a bit deeper.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for Mene, this is the formula:

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

0.002 = CA$37k ÷ (CA$29m - CA$11m) (Based on the trailing twelve months to June 2023).

So, Mene has an ROCE of 0.2%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 13%.

See our latest analysis for Mene

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Mene, check out these free graphs here.

How Are Returns Trending?

We're delighted to see that Mene is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but now it's turned around, earning 0.2% which is no doubt a relief for some early shareholders. In regards to capital employed, Mene is using 24% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. This could potentially mean that the company is selling some of its assets.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 38% of the business, which is more than it was five years ago. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

Our Take On Mene's ROCE

In a nutshell, we're pleased to see that Mene has been able to generate higher returns from less capital. Astute investors may have an opportunity here because the stock has declined 36% in the last three years. So researching this company further and determining whether or not these trends will continue seems justified.

If you want to know some of the risks facing Mene we've found 3 warning signs (1 is concerning!) that you should be aware of before investing here.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.