If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. With that in mind, the ROCE of MFO Spólka Akcyjna (WSE:MFO) looks decent, right now, so lets see what the trend of returns can tell us.
Return On Capital Employed (ROCE): What is it?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on MFO Spólka Akcyjna is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = zł28m ÷ (zł282m - zł75m) (Based on the trailing twelve months to June 2020).
So, MFO Spólka Akcyjna has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 9.6% generated by the Metals and Mining industry.
Historical performance is a great place to start when researching a stock so above you can see the gauge for MFO Spólka Akcyjna's ROCE against it's prior returns. If you're interested in investigating MFO Spólka Akcyjna's past further, check out this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has consistently earned 14% for the last five years, and the capital employed within the business has risen 206% in that time. 14% is a pretty standard return, and it provides some comfort knowing that MFO Spólka Akcyjna has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 27% of total assets, is good to see from a business owner's perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.
Our Take On MFO Spólka Akcyjna's ROCE
The main thing to remember is that MFO Spólka Akcyjna has proven its ability to continually reinvest at respectable rates of return. On top of that, the stock has rewarded shareholders with a remarkable 106% return to those who've held over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.
If you want to continue researching MFO Spólka Akcyjna, you might be interested to know about the 2 warning signs that our analysis has discovered.
While MFO Spólka Akcyjna may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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This article by Simply Wall St is general in nature. 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.
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