Stock Analysis

Returns On Capital Signal Tricky Times Ahead For Mondi (LON:MNDI)

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LSE:MNDI
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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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Mondi (LON:MNDI) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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. The formula for this calculation on Mondi is:

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

0.12 = €869m ÷ (€9.0b - €1.6b) (Based on the trailing twelve months to June 2021).

Thus, Mondi has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Forestry industry average of 7.9% it's much better.

View our latest analysis for Mondi

roce
LSE:MNDI Return on Capital Employed October 20th 2021

In the above chart we have measured Mondi's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Mondi here for free.

So How Is Mondi's ROCE Trending?

In terms of Mondi's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 19% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line On Mondi's ROCE

In summary, Mondi is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors may be recognizing these trends since the stock has only returned a total of 33% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

If you want to continue researching Mondi, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Mondi 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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