There's Been No Shortage Of Growth Recently For Mecanica Ceahlau's (BVB:MECF) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Mecanica Ceahlau (BVB:MECF) so let's look a bit deeper.

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. To calculate this metric for Mecanica Ceahlau, this is the formula:

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

0.012 = RON706k ÷ (RON71m - RON14m) (Based on the trailing twelve months to March 2023).

Thus, Mecanica Ceahlau has an ROCE of 1.2%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 8.1%.

See our latest analysis for Mecanica Ceahlau

Historical performance is a great place to start when researching a stock so above you can see the gauge for Mecanica Ceahlau's ROCE against it's prior returns. If you'd like to look at how Mecanica Ceahlau has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

Shareholders will be relieved that Mecanica Ceahlau has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 1.2%, which is always encouraging. While returns have increased, the amount of capital employed by Mecanica Ceahlau has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

In Conclusion...

As discussed above, Mecanica Ceahlau appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Considering the stock has delivered 8.3% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

If you'd like to know more about Mecanica Ceahlau, we've spotted 4 warning signs, and 2 of them are concerning.

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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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.