If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Mencast Holdings' (Catalist:5NF) returns on capital, so let's have a look.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Mencast Holdings:

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

0.04 = S$4.2m ÷ (S$192m - S$87m) (Based on the trailing twelve months to June 2023).

Therefore, Mencast Holdings has an ROCE of 4.0%. In absolute terms, that's a low return and it also under-performs the Energy Services industry average of 5.5%.

Check out our latest analysis for Mencast Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Mencast Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Mencast Holdings, check out these free graphs here.

The Trend Of ROCE

It's great to see that Mencast Holdings has started to generate some pre-tax earnings from prior investments. While the business is profitable now, it used to be incurring losses on invested capital five years ago. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 42%. This could potentially mean that the company is selling some of its assets.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 45% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

What We Can Learn From Mencast Holdings' ROCE

In summary, it's great to see that Mencast Holdings has been able to turn things around and earn higher returns on lower amounts of capital. Given the stock has declined 54% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

One more thing: We've identified 6 warning signs with Mencast Holdings (at least 1 which is a bit unpleasant) , and understanding them would certainly be useful.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.