We Like These Underlying Return On Capital Trends At Mevaco (ATH:MEVA)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Mevaco (ATH:MEVA) and its trend of ROCE, we really liked what we saw.

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

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. Analysts use this formula to calculate it for Mevaco:

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

0.022 = €600k ÷ (€36m - €9.6m) (Based on the trailing twelve months to June 2021).

So, Mevaco has an ROCE of 2.2%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 9.7%.

Check out 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're interested in investigating Mevaco's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

We're delighted to see that Mevaco is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but now it's turned around, earning 2.2% which is no doubt a relief for some early shareholders. In regards to capital employed, Mevaco is using 20% 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. Mevaco could be selling under-performing assets since the ROCE is improving.

The Bottom Line

In a nutshell, we're pleased to see that Mevaco has been able to generate higher returns from less capital. Since the stock has returned a staggering 138% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

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

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.

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.

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