M&Z (MTSE:MZ) Knows How To Allocate Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. That's why when we briefly looked at M&Z's (MTSE:MZ) ROCE trend, we were very happy with what we saw.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for M&Z:

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

0.26 = €2.9m ÷ (€18m - €7.3m) (Based on the trailing twelve months to June 2022).

So, M&Z has an ROCE of 26%. In absolute terms that's a great return and it's even better than the Consumer Retailing industry average of 9.9%.

View our latest analysis for M&Z

Historical performance is a great place to start when researching a stock so above you can see the gauge for M&Z's ROCE against it's prior returns. If you'd like to look at how M&Z has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is M&Z's ROCE Trending?

M&Z deserves to be commended in regards to it's returns. The company has employed 63% more capital in the last four years, and the returns on that capital have remained stable at 26%. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If M&Z can keep this up, we'd be very optimistic about its future.

On a side note, M&Z's current liabilities are still rather high at 40% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

M&Z has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. Despite the good fundamentals, total returns from the stock have been virtually flat over the last year. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.

M&Z does have some risks, we noticed 3 warning signs (and 1 which is concerning) we think you should know about.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high 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.