Stock Analysis

Returns At Mitsides (CSE:MIT) Are On The Way Up

CSE:MIT
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What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Mitsides' (CSE:MIT) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Mitsides is:

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

0.021 = €362k ÷ (€40m - €23m) (Based on the trailing twelve months to June 2022).

Therefore, Mitsides has an ROCE of 2.1%. In absolute terms, that's a low return and it also under-performs the Food industry average of 10%.

Our analysis indicates that MIT is potentially overvalued!

roce
CSE:MIT Return on Capital Employed October 14th 2022

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

So How Is Mitsides' ROCE Trending?

We're delighted to see that Mitsides is reaping rewards from its investments and has now broken into profitability. While the business is profitable now, it used to be incurring losses on invested capital five years ago. In regards to capital employed, Mitsides is using 32% 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. Mitsides could be selling under-performing assets since the ROCE is improving.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 56% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

What We Can Learn From Mitsides' ROCE

From what we've seen above, Mitsides has managed to increase it's returns on capital all the while reducing it's capital base. Given the stock has declined 55% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

On a separate note, we've found 3 warning signs for Mitsides you'll probably want to know about.

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.

Valuation is complex, but we're helping make it simple.

Find out whether Mitsides 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.

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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.