Mytilineos (ATH:MYTIL) Shareholders Will Want The ROCE Trajectory To Continue

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Mytilineos (ATH:MYTIL) and its trend of ROCE, we really liked what we saw.

What Is 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. Analysts use this formula to calculate it for Mytilineos:

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

0.17 = €731m ÷ (€6.9b - €2.7b) (Based on the trailing twelve months to December 2022).

So, Mytilineos has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Industrials industry average of 8.4% it's much better.

See our latest analysis for Mytilineos

In the above chart we have measured Mytilineos' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Mytilineos.

SWOT Analysis for Mytilineos

What Can We Tell From Mytilineos' ROCE Trend?

We like the trends that we're seeing from Mytilineos. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 17%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 79%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 40% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

In Conclusion...

To sum it up, Mytilineos has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 364% 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 Mytilineos can keep these trends up, it could have a bright future ahead.

One more thing to note, we've identified 2 warning signs with Mytilineos and understanding them should be part of your investment process.

While Mytilineos 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.