Returns On Capital At Malmbergs Elektriska (STO:MEAB B) Paint A Concerning Picture

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after investigating Malmbergs Elektriska (STO:MEAB B), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

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 Malmbergs Elektriska is:

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

0.092 = kr40m ÷ (kr558m - kr124m) (Based on the trailing twelve months to March 2022).

So, Malmbergs Elektriska has an ROCE of 9.2%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 16%.

View our latest analysis for Malmbergs Elektriska

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

What Does the ROCE Trend For Malmbergs Elektriska Tell Us?

When we looked at the ROCE trend at Malmbergs Elektriska, we didn't gain much confidence. Around five years ago the returns on capital were 28%, but since then they've fallen to 9.2%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Malmbergs Elektriska's ROCE

In summary, Malmbergs Elektriska is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 67% in the last five years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

One more thing: We've identified 4 warning signs with Malmbergs Elektriska (at least 1 which shouldn't be ignored) , and understanding them would certainly be useful.

While Malmbergs Elektriska 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.