Mostostal Plock (WSE:MSP) Is Very Good At Capital Allocation

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. With that in mind, the ROCE of Mostostal Plock (WSE:MSP) looks great, so lets see what the trend can tell us.

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 Mostostal Plock, this is the formula:

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

0.33 = zł16m ÷ (zł110m - zł60m) (Based on the trailing twelve months to September 2021).

Therefore, Mostostal Plock has an ROCE of 33%. In absolute terms that's a great return and it's even better than the Construction industry average of 13%.

View our latest analysis for Mostostal Plock

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Mostostal Plock, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

Mostostal Plock has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 33% which is a sight for sore eyes. Not only that, but the company is utilizing 27% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 55% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Key Takeaway

In summary, it's great to see that Mostostal Plock has managed to break into profitability and is continuing to reinvest in its business. Since the stock has returned a staggering 157% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Mostostal Plock can keep these trends up, it could have a bright future ahead.

On a final note, we've found 2 warning signs for Mostostal Plock that we think you should be aware of.

Mostostal Plock is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.