The Returns At MFO Spólka Akcyjna (WSE:MFO) Provide Us With Signs Of What's To Come

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. Having said that, from a first glance at MFO Spólka Akcyjna (WSE:MFO) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 MFO Spólka Akcyjna is:

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

0.12 = zł26m ÷ (zł313m - zł100m) (Based on the trailing twelve months to September 2020).

Therefore, MFO Spólka Akcyjna has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 9.2% generated by the Metals and Mining industry.

View our latest analysis for MFO Spólka Akcyjna

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 MFO Spólka Akcyjna's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From MFO Spólka Akcyjna's ROCE Trend?

On the surface, the trend of ROCE at MFO Spólka Akcyjna doesn't inspire confidence. To be more specific, ROCE has fallen from 16% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, MFO Spólka Akcyjna has done well to pay down its current liabilities to 32% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line

To conclude, we've found that MFO Spólka Akcyjna is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 175% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

On a separate note, we've found 2 warning signs for MFO Spólka Akcyjna you'll probably want to 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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