Stock Analysis

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

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LSE:MNDI
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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. However, after investigating Mondi (LON:MNDI), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

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 Mondi, this is the formula:

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).

So, Mondi has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 9.8% generated by the Forestry industry.

See our latest analysis for Mondi

roce
LSE:MNDI Return on Capital Employed January 18th 2022

Above you can see how the current ROCE for Mondi compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Mondi.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Mondi, we didn't gain much confidence. Around five years ago the returns on capital were 19%, but since then they've fallen to 12%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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.

Our Take On Mondi's ROCE

To conclude, we've found that Mondi is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 28% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you'd like to know about the risks facing Mondi, we've discovered 1 warning sign that you should be aware of.

While Mondi may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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