Did you know there are some financial metrics that can provide clues of a potential 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. So on that note, Mesnac (SZSE:002073) looks quite promising in regards to its trends of return on capital.

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. Analysts use this formula to calculate it for Mesnac:

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

0.083 = CN¥605m ÷ (CN¥17b - CN¥10b) (Based on the trailing twelve months to September 2024).

Thus, Mesnac has an ROCE of 8.3%. In absolute terms, that's a low return, but it's much better than the Machinery industry average of 5.2%.

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Mesnac has performed in the past in other metrics, you can view this free graph of Mesnac's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

The fact that Mesnac is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 8.3% which is a sight for sore eyes. In addition to that, Mesnac is employing 52% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 58% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.

The Bottom Line On Mesnac's ROCE

In summary, it's great to see that Mesnac has managed to break into profitability and is continuing to reinvest in its business. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 77% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing, we've spotted 1 warning sign facing Mesnac that you might find interesting.

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.