Returns On Capital At Mendelson Infrastructures & Industries (TLV:MNIN) Paint A Concerning Picture

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Although, when we looked at Mendelson Infrastructures & Industries (TLV:MNIN), it didn't seem to tick all of these boxes.

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. To calculate this metric for Mendelson Infrastructures & Industries, this is the formula:

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

0.11 = ₪70m ÷ (₪1.0b - ₪403m) (Based on the trailing twelve months to June 2023).

Thus, Mendelson Infrastructures & Industries has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Trade Distributors industry average of 7.9% it's much better.

Check out our latest analysis for Mendelson Infrastructures & Industries

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Mendelson Infrastructures & Industries' past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Mendelson Infrastructures & Industries' ROCE Trend?

On the surface, the trend of ROCE at Mendelson Infrastructures & Industries doesn't inspire confidence. To be more specific, ROCE has fallen from 15% 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.

On a side note, Mendelson Infrastructures & Industries has done well to pay down its current liabilities to 39% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Mendelson Infrastructures & Industries' ROCE

Bringing it all together, while we're somewhat encouraged by Mendelson Infrastructures & Industries' reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 15% in the last five years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you want to continue researching Mendelson Infrastructures & Industries, you might be interested to know about the 4 warning signs that our analysis has discovered.

While Mendelson Infrastructures & Industries 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.