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Investors Will Want Mene's (CVE:MENE) Growth In ROCE To Persist

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Mene (CVE:MENE) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Mene:

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

0.021 = CA$358k ÷ (CA$29m - CA$12m) (Based on the trailing twelve months to June 2022).

Therefore, Mene has an ROCE of 2.1%. Ultimately, that's a low return and it under-performs the Luxury industry average of 15%.

See our latest analysis for Mene

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Historical performance is a great place to start when researching a stock so above you can see the gauge for Mene's ROCE against it's prior returns. If you'd like to look at how Mene has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Mene's ROCE Trending?

Like most people, we're pleased that Mene is now generating some pretax earnings. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 2.1% on their capital employed. 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 28%. Mene could be selling under-performing assets since the ROCE is improving.

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 41% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

In Conclusion...

From what we've seen above, Mene has managed to increase it's returns on capital all the while reducing it's capital base. Given the stock has declined 13% in the last three 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.

Like most companies, Mene does come with some risks, and we've found 1 warning sign that you should be aware of.

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.

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.

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