Returns On Capital Are Showing Encouraging Signs At MPP Jedinstvo a.d (BELEX:JESV)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. So on that note, MPP Jedinstvo a.d (BELEX:JESV) looks quite promising in regards to its trends of return on capital.

Understanding 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. The formula for this calculation on MPP Jedinstvo a.d is:

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

0.056 = дин150m ÷ (дин7.9b - дин5.2b) (Based on the trailing twelve months to September 2020).

So, MPP Jedinstvo a.d has an ROCE of 5.6%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 10%.

View our latest analysis for MPP Jedinstvo a.d

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of MPP Jedinstvo a.d, check out these free graphs here.

How Are Returns Trending?

You'd find it hard not to be impressed with the ROCE trend at MPP Jedinstvo a.d. The data shows that returns on capital have increased by 76% over the trailing five years. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Interestingly, the business may be becoming more efficient because it's applying 47% less capital than it was five years ago. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 66% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.

The Bottom Line On MPP Jedinstvo a.d's ROCE

In summary, it's great to see that MPP Jedinstvo a.d has been able to turn things around and earn higher returns on lower amounts of capital. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 34% to shareholders. So with that in mind, we think the stock deserves further research.

On a final note, we found 3 warning signs for MPP Jedinstvo a.d (1 doesn't sit too well with us) you should be aware of.

While MPP Jedinstvo a.d 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. 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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