There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Mex Polska (WSE:MEX), we don't think it's current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What Is It?
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 Mex Polska is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = zł6.4m ÷ (zł66m - zł19m) (Based on the trailing twelve months to September 2022).
Thus, Mex Polska has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 9.1% generated by the Hospitality industry.
View our latest analysis for Mex Polska
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're interested in investigating Mex Polska's past further, check out this free graph of past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
In terms of Mex Polska's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 19% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
What We Can Learn From Mex Polska's ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Mex Polska. These growth trends haven't led to growth returns though, since the stock has fallen 52% over the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.
Mex Polska does have some risks, we noticed 4 warning signs (and 3 which are potentially serious) we think you should know about.
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. 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.
About WSE:MEX
Mex Polska
Develops, owns, operates, manages, and franchises restaurants primarily in Poland.
Good value with adequate balance sheet.
