Mevaco (ATH:MEVA) Is Looking To Continue Growing Its Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Mevaco (ATH:MEVA) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Mevaco, this is the formula:

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

0.021 = €566k ÷ (€36m - €9.6m) (Based on the trailing twelve months to June 2021).

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

See our latest analysis for Mevaco

Historical performance is a great place to start when researching a stock so above you can see the gauge for Mevaco's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Mevaco, check out these free graphs here.

What Can We Tell From Mevaco's ROCE Trend?

It's great to see that Mevaco has started to generate some pre-tax earnings from prior investments. The company was generating losses five years ago, but now it's turned around, earning 2.1% which is no doubt a relief for some early shareholders. Additionally, the business is utilizing 20% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

The Bottom Line

In a nutshell, we're pleased to see that Mevaco has been able to generate higher returns from less capital. And a remarkable 127% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Mevaco can keep these trends up, it could have a bright future ahead.

One more thing, we've spotted 1 warning sign facing Mevaco that you might find interesting.

While Mevaco 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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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.