MercadoLibre (NASDAQ:MELI) Knows How To Allocate Capital

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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. With that in mind, the ROCE of MercadoLibre (NASDAQ:MELI) looks attractive right now, so lets see what the trend of returns can tell us.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for MercadoLibre, this is the formula:

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

0.20 = US$1.0b ÷ (US$14b - US$8.6b) (Based on the trailing twelve months to December 2022).

Therefore, MercadoLibre has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Multiline Retail industry average of 15%.

See our latest analysis for MercadoLibre

Above you can see how the current ROCE for MercadoLibre compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for MercadoLibre.

SWOT Analysis for MercadoLibre

What Does the ROCE Trend For MercadoLibre Tell Us?

MercadoLibre deserves to be commended in regards to it's returns. Over the past five years, ROCE has remained relatively flat at around 20% and the business has deployed 634% more capital into its operations. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

Another thing to note, MercadoLibre has a high ratio of current liabilities to total assets of 62%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

In summary, we're delighted to see that MercadoLibre has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And long term investors would be thrilled with the 301% return they've received over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

MercadoLibre does have some risks though, and we've spotted 2 warning signs for MercadoLibre that you might be interested in.

MercadoLibre is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.