Investors Shouldn't Overlook Mostostal Zabrze's (WSE:MSZ) Impressive Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Speaking of which, we noticed some great changes in Mostostal Zabrze's (WSE:MSZ) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Mostostal Zabrze:

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

0.21 = zł59m ÷ (zł678m - zł402m) (Based on the trailing twelve months to December 2022).

Therefore, Mostostal Zabrze has an ROCE of 21%. That's a fantastic return and not only that, it outpaces the average of 13% earned by companies in a similar industry.

See our latest analysis for Mostostal Zabrze

Above you can see how the current ROCE for Mostostal Zabrze compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Mostostal Zabrze here for free.

What Can We Tell From Mostostal Zabrze's ROCE Trend?

We're delighted to see that Mostostal Zabrze is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 21% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Mostostal Zabrze is utilizing 53% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a separate but related note, it's important to know that Mostostal Zabrze has a current liabilities to total assets ratio of 59%, which we'd consider pretty high. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Mostostal Zabrze's ROCE

To the delight of most shareholders, Mostostal Zabrze has now broken into profitability. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

One final note, you should learn about the 2 warning signs we've spotted with Mostostal Zabrze (including 1 which makes us a bit uncomfortable) .

Mostostal Zabrze 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.