Slowing Rates Of Return At Mehadrin (TLV:MEDN) Leave Little Room For Excitement

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Having said that, from a first glance at Mehadrin (TLV:MEDN) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

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 Mehadrin:

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

0.042 = ₪33m ÷ (₪1.2b - ₪400m) (Based on the trailing twelve months to June 2021).

So, Mehadrin has an ROCE of 4.2%. Ultimately, that's a low return and it under-performs the Food industry average of 12%.

See our latest analysis for Mehadrin

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

So How Is Mehadrin's ROCE Trending?

There hasn't been much to report for Mehadrin's returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Mehadrin to be a multi-bagger going forward.

On a side note, Mehadrin has done well to reduce current liabilities to 34% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

The Bottom Line

In summary, Mehadrin isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you want to continue researching Mehadrin, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Mehadrin may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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