Should We Be Excited About The Trends Of Returns At Masi Agricola (BIT:MASI)?

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Masi Agricola (BIT:MASI) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. To calculate this metric for Masi Agricola, this is the formula:

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

0.02 = €3.2m ÷ (€175m - €17m) (Based on the trailing twelve months to June 2020).

Thus, Masi Agricola has an ROCE of 2.0%. Ultimately, that's a low return and it under-performs the Beverage industry average of 9.1%.

View our latest analysis for Masi Agricola

In the above chart we have measured Masi Agricola's 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 Masi Agricola.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Masi Agricola, we didn't gain much confidence. Around five years ago the returns on capital were 14%, but since then they've fallen to 2.0%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

What We Can Learn From Masi Agricola's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Masi Agricola have fallen, meanwhile the business is employing more capital than it was five years ago. It should come as no surprise then that the stock has fallen 32% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Masi Agricola does have some risks though, and we've spotted 2 warning signs for Masi Agricola that you might be interested in.

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. 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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