What Do The Returns On Capital At MDI Energia (WSE:MDI) Tell Us?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at MDI Energia (WSE:MDI), it didn't seem to tick all of these boxes.

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. The formula for this calculation on MDI Energia is:

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

0.14 = zł5.5m ÷ (zł133m - zł94m) (Based on the trailing twelve months to September 2020).

Thus, MDI Energia has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 6.3% generated by the Renewable Energy industry.

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're interested in investigating MDI Energia's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

Over the past five years, MDI Energia's ROCE and capital employed have both remained mostly flat. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So unless we see a substantial change at MDI Energia in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

Another thing to note, MDI Energia has a high ratio of current liabilities to total assets of 71%. 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. Unsurprisingly, the stock has only gained 13% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

MDI Energia does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those can't be ignored...

While MDI Energia 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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