We Like These Underlying Return On Capital Trends At Mesnac (SZSE:002073)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. So when we looked at Mesnac (SZSE:002073) and its trend of ROCE, we really liked what we saw.

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 Mesnac:

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

0.06 = CN¥396m ÷ (CN¥16b - CN¥9.3b) (Based on the trailing twelve months to December 2023).

Therefore, Mesnac has an ROCE of 6.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.3%.

View our latest analysis for Mesnac

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

What Can We Tell From Mesnac's ROCE Trend?

We're delighted to see that Mesnac is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 6.0%, which is always encouraging. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

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 58% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

The Key Takeaway

To bring it all together, Mesnac has done well to increase the returns it's generating from its capital employed. Since the stock has returned a solid 77% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you'd like to know about the risks facing Mesnac, we've discovered 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. 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.