MercadoLibre (NASDAQ:MELI) Knows How To Allocate Capital Effectively

There are a few key trends to look for if we want to identify the next multi-bagger. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at the ROCE trend of MercadoLibre (NASDAQ:MELI) we really liked what we saw.

Understanding 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 MercadoLibre, this is the formula:

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

0.23 = US$1.2b ÷ (US$14b - US$8.8b) (Based on the trailing twelve months to March 2023).

Thus, MercadoLibre has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Multiline Retail industry average of 11%.

Check out our latest analysis for MercadoLibre

In the above chart we have measured MercadoLibre'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 MercadoLibre.

How Are Returns Trending?

The trends we've noticed at MercadoLibre are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 23%. Basically the business is earning more per dollar of capital invested and in addition to that, 748% more capital is being employed now too. So we're very much inspired by what we're seeing at MercadoLibre thanks to its ability to profitably reinvest capital.

On a side note, MercadoLibre's current liabilities are still rather high at 62% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

All in all, it's terrific to see that MercadoLibre is reaping the rewards from prior investments and is growing its capital base. And a remarkable 213% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if MercadoLibre can keep these trends up, it could have a bright future ahead.

On a separate note, we've found 1 warning sign for MercadoLibre you'll probably want to know about.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.