ML System (WSE:MLS) Will Be Hoping To Turn Its Returns On Capital Around

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. However, after briefly looking over the numbers, we don't think ML System (WSE:MLS) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for ML System:

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

0.0031 = zł800k ÷ (zł387m - zł126m) (Based on the trailing twelve months to September 2022).

So, ML System has an ROCE of 0.3%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 16%.

View our latest analysis for ML System

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

The Trend Of ROCE

In terms of ML System's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 7.2%, but since then they've fallen to 0.3%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On ML System's ROCE

While returns have fallen for ML System in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And long term investors must be optimistic going forward because the stock has returned a huge 180% to shareholders in the last three years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

If you'd like to know more about ML System, we've spotted 3 warning signs, and 2 of them are potentially serious.

While ML System 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. 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.