MDI Energia (WSE:MDI) Has More To Do To Multiply In Value Going Forward

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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think MDI Energia (WSE:MDI) 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)?

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 MDI Energia:

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

0.20 = zł7.4m ÷ (zł128m - zł90m) (Based on the trailing twelve months to December 2020).

So, MDI Energia has an ROCE of 20%. In absolute terms, that's a satisfactory return, but compared to the Renewable Energy industry average of 5.1% it's much better.

Check out our latest analysis for MDI Energia

Historical performance is a great place to start when researching a stock so above you can see the gauge for MDI Energia's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of MDI Energia, check out these free graphs here.

How Are Returns Trending?

There hasn't been much to report for MDI Energia's returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect MDI Energia to be a multi-bagger going forward.

On a separate but related note, it's important to know that MDI Energia has a current liabilities to total assets ratio of 70%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

In summary, MDI Energia isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And with the stock having returned a mere 12% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you want to know some of the risks facing MDI Energia we've found 2 warning signs (1 is a bit unpleasant!) that you should be aware of before investing here.

While MDI Energia 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. 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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