Returns At Mene (CVE:MENE) Are On The Way Up

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Mene (CVE:MENE) so let's look a bit deeper.

What is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Mene:

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

0.024 = CA$409k ÷ (CA$30m - CA$13m) (Based on the trailing twelve months to March 2022).

Thus, Mene has an ROCE of 2.4%. Ultimately, that's a low return and it under-performs the Luxury industry average of 15%.

View our latest analysis for Mene

Historical performance is a great place to start when researching a stock so above you can see the gauge for Mene's ROCE against it's prior returns. If you'd like to look at how Mene has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Mene's ROCE Trending?

We're delighted to see that Mene is reaping rewards from its investments and has now broken into profitability. The company now earns 2.4% on its capital, because four years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. Because in the end, a business can only get so efficient.

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. The current liabilities has increased to 43% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.

What We Can Learn From Mene's ROCE

In summary, we're delighted to see that Mene has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Investors may not be impressed by the favorable underlying trends yet because over the last three years the stock has only returned 9.1% to shareholders. So with that in mind, we think the stock deserves further research.

While Mene looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether MENE is currently trading for a fair price.

While Mene isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.