Be Wary Of Marzocchi Pompe (BIT:MARP) And Its Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Marzocchi Pompe (BIT:MARP), it didn't seem to tick all of these boxes.

Understanding 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. To calculate this metric for Marzocchi Pompe, this is the formula:

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

0.023 = €750k ÷ (€47m - €15m) (Based on the trailing twelve months to June 2021).

Thus, Marzocchi Pompe has an ROCE of 2.3%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 6.1%.

Check out our latest analysis for Marzocchi Pompe

Historical performance is a great place to start when researching a stock so above you can see the gauge for Marzocchi Pompe's ROCE against it's prior returns. If you're interested in investigating Marzocchi Pompe's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Marzocchi Pompe's ROCE Trending?

On the surface, the trend of ROCE at Marzocchi Pompe doesn't inspire confidence. Around five years ago the returns on capital were 8.9%, but since then they've fallen to 2.3%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From Marzocchi Pompe's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Marzocchi Pompe. Furthermore the stock has climbed 48% over the last year, it would appear that investors are upbeat about the future. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

One more thing: We've identified 4 warning signs with Marzocchi Pompe (at least 1 which doesn't sit too well with us) , and understanding them would certainly be useful.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.