There Are Reasons To Feel Uneasy About Metalac a.d. Gornji Milanovac's (BELEX:MTLC) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. Although, when we looked at Metalac a.d. Gornji Milanovac (BELEX:MTLC), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Metalac a.d. Gornji Milanovac, this is the formula:

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

0.083 = дин646m ÷ (дин11b - дин3.0b) (Based on the trailing twelve months to June 2022).

So, Metalac a.d. Gornji Milanovac has an ROCE of 8.3%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 11%.

Our analysis indicates that MTLC is potentially undervalued!

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'd like to look at how Metalac a.d. Gornji Milanovac has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Metalac a.d. Gornji Milanovac's ROCE Trending?

On the surface, the trend of ROCE at Metalac a.d. Gornji Milanovac doesn't inspire confidence. Around five years ago the returns on capital were 13%, but since then they've fallen to 8.3%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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.

What We Can Learn From Metalac a.d. Gornji Milanovac's ROCE

Bringing it all together, while we're somewhat encouraged by Metalac a.d. Gornji Milanovac's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 36% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Like most companies, Metalac a.d. Gornji Milanovac does come with some risks, and we've found 2 warning signs that you should be aware of.

While Metalac a.d. Gornji Milanovac 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. 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.