The Return Trends At MLS (SZSE:002745) Look Promising

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at MLS (SZSE:002745) and its trend of ROCE, we really liked what we saw.

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

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

0.058 = CN¥850m ÷ (CN¥24b - CN¥8.9b) (Based on the trailing twelve months to June 2024).

Thus, MLS has an ROCE of 5.8%. On its own that's a low return, but compared to the average of 4.8% generated by the Semiconductor industry, it's much better.

Check out our latest analysis for MLS

In the above chart we have measured MLS' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for MLS .

What The Trend Of ROCE Can Tell Us

MLS has not disappointed with their ROCE growth. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 21% over the last five years. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 38%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that MLS has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Bottom Line

As discussed above, MLS appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Astute investors may have an opportunity here because the stock has declined 34% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.

MLS does have some risks though, and we've spotted 1 warning sign for MLS that you might be interested in.

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.