Slowing Rates Of Return At MFO (WSE:MFO) Leave Little Room For Excitement

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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 MFO's (WSE:MFO) ROCE trend, we were pretty happy with what we saw.

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. Analysts use this formula to calculate it for MFO:

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

0.19 = zł73m ÷ (zł514m - zł135m) (Based on the trailing twelve months to September 2022).

So, MFO has an ROCE of 19%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Metals and Mining industry average of 17%.

Check out our latest analysis for MFO

Historical performance is a great place to start when researching a stock so above you can see the gauge for MFO's ROCE against it's prior returns. If you're interested in investigating MFO's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For MFO Tell Us?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has employed 169% more capital in the last five years, and the returns on that capital have remained stable at 19%. Since 19% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

The Key Takeaway

In the end, MFO has proven its ability to adequately reinvest capital at good rates of return. In light of this, the stock has only gained 20% over the last five years for shareholders who have owned the stock in this period. So to determine if MFO is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

Like most companies, MFO does come with some risks, and we've found 3 warning signs that you should be aware of.

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.