The Returns On Capital At ML System (WSE:MLS) Don't Inspire Confidence

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Having said that, from a first glance at ML System (WSE:MLS) 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?

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)

0.0061 = zł2.4m ÷ (zł533m - zł142m) (Based on the trailing twelve months to September 2023).

Therefore, ML System has an ROCE of 0.6%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 16%.

Check out 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 covering ML System's past earnings, revenue and cash flow.

What Does the ROCE Trend For ML System Tell Us?

On the surface, the trend of ROCE at ML System doesn't inspire confidence. Around five years ago the returns on capital were 7.7%, but since then they've fallen to 0.6%. 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by ML System's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 86% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you'd like to know more about ML System, we've spotted 4 warning signs, and 2 of them shouldn't be ignored.

While ML System isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.