Returns On Capital At Mermeren Kombinat AD (ATH:MERKO) Paint A Concerning Picture

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. So when we looked at Mermeren Kombinat AD (ATH:MERKO), they do have a high ROCE, but we weren't exactly elated from how returns are trending.

What Is 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 Mermeren Kombinat AD is:

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

0.39 = ден975m ÷ (ден2.6b - ден76m) (Based on the trailing twelve months to December 2022).

Thus, Mermeren Kombinat AD has an ROCE of 39%. In absolute terms that's a great return and it's even better than the Basic Materials industry average of 9.6%.

View our latest analysis for Mermeren Kombinat AD

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

How Are Returns Trending?

In terms of Mermeren Kombinat AD's historical ROCE movements, the trend isn't fantastic. Historically returns on capital were even higher at 52%, but they have dropped over the last five years. 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.

The Bottom Line On Mermeren Kombinat AD's ROCE

To conclude, we've found that Mermeren Kombinat AD is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 50% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Mermeren Kombinat AD does have some risks, we noticed 3 warning signs (and 2 which don't sit too well with us) we think you should know about.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.