Some Investors May Be Worried About Mazarin's (CVE:MAZ.H) Returns On Capital
To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. So after glancing at the trends within Mazarin (CVE:MAZ.H), we weren't too hopeful.
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. Analysts use this formula to calculate it for Mazarin:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.064 = CA$2.1m ÷ (CA$38m - CA$5.8m) (Based on the trailing twelve months to December 2023).
Therefore, Mazarin has an ROCE of 6.4%. In absolute terms, that's a low return, but it's much better than the Metals and Mining industry average of 1.7%.
See our latest analysis for Mazarin
Historical performance is a great place to start when researching a stock so above you can see the gauge for Mazarin's ROCE against it's prior returns. If you'd like to look at how Mazarin has performed in the past in other metrics, you can view this free graph of Mazarin's past earnings, revenue and cash flow.
So How Is Mazarin's ROCE Trending?
We are a bit worried about the trend of returns on capital at Mazarin. To be more specific, the ROCE was 8.5% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Mazarin to turn into a multi-bagger.
What We Can Learn From Mazarin's ROCE
In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Despite the concerning underlying trends, the stock has actually gained 20% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.
On a final note, we found 4 warning signs for Mazarin (2 don't sit too well with us) you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.