Stock Analysis
Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Speaking of which, we noticed some great changes in Mosaic's (NYSE:MOS) returns on capital, so let's have a look.
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. To calculate this metric for Mosaic, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.27 = US$4.8b ÷ (US$23b - US$5.5b) (Based on the trailing twelve months to December 2022).
Thus, Mosaic has an ROCE of 27%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 11%.
Check out our latest analysis for Mosaic
In the above chart we have measured Mosaic's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Mosaic.
How Are Returns Trending?
Mosaic is showing promise given that its ROCE is trending up and to the right. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 924% over the last five years. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 24% of the business, which is more than it was five years ago. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.
The Bottom Line
To bring it all together, Mosaic has done well to increase the returns it's generating from its capital employed. Since the stock has returned a solid 95% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.
One final note, you should learn about the 2 warning signs we've spotted with Mosaic (including 1 which makes us a bit uncomfortable) .
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
What are the risks and opportunities for Mosaic?
The Mosaic Company, through its subsidiaries, produces and markets concentrated phosphate and potash crop nutrients in North America and internationally.
Rewards
Price-To-Earnings ratio (4.3x) is below the US market (15.1x)
Earnings grew by 119.7% over the past year
Risks
Earnings are forecast to decline by an average of 21.3% per year for the next 3 years
Further research on
Mosaic
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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.
About NYSE:MOS
Mosaic
The Mosaic Company, through its subsidiaries, produces and markets concentrated phosphate and potash crop nutrients in North America and internationally.
Flawless balance sheet with outstanding track record.
