If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Mondo TV (BIT:MTV), it didn't seem to tick all of these boxes.
What is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Mondo TV is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = €9.3m ÷ (€107m - €18m) (Based on the trailing twelve months to September 2021).
So, Mondo TV has an ROCE of 10%. In isolation, that's a pretty standard return but against the Entertainment industry average of 15%, it's not as good.
In the above chart we have measured Mondo TV'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 Mondo TV.
What Can We Tell From Mondo TV's ROCE Trend?
Unfortunately, the trend isn't great with ROCE falling from 19% five years ago, while capital employed has grown 64%. That being said, Mondo TV raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Mondo TV probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.
The Key Takeaway
While returns have fallen for Mondo TV in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. Despite these promising trends, the stock has collapsed 72% over the last five years, so there could be other factors hurting the company's prospects. Therefore, we'd suggest researching the stock further to uncover more about the business.
If you'd like to know about the risks facing Mondo TV, we've discovered 3 warning signs that you should be aware of.
While Mondo TV 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.
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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.