Here’s what to think about the deceleration in Mainova’s yields (FRA:MNV6)

Finding a business that has the potential to grow significantly isn’t easy, but it is possible if we look at a few key financial metrics. A common approach is to try to find a company with Return on capital employed (ROCE) which is increasing, in line with growth amount capital employed. Simply put, these types of businesses are slot machines, meaning they continually reinvest their profits at ever-higher rates of return. That said, at a first glance at mainova (ENG:MNV6) we’re not jumping off our chairs on the yield trend, but taking a closer look.

What is return on capital employed (ROCE)?

If you’ve never worked with ROCE before, it measures the “yield” (pre-tax profit) a company generates from the capital used in its business. The formula for this calculation on Mainova is as follows:

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

0.076 = €399m ÷ (€6.4bn – €1.1bn) (Based on the last twelve months to December 2021).

Therefore, Mainova has a ROCE of 7.6%. In absolute terms, that’s a poor return, but it’s far better than the integrated utility industry average of 5.2%.

See our latest review for Mainova

DB:MNV6 Return on Capital Employed June 20, 2022

Although the past is not indicative of the future, it can be useful to know the historical performance of a company, which is why we have this graph above. If you want to investigate more about Mainova’s past, check out this free chart of past profits, revenue and cash flow.

What is the return trend?

As for Mainova’s historic ROCE trend, it doesn’t really demand attention. The company has consistently earned 7.6% over the past five years and the capital employed within the company has increased by 144% over this period. Since the company has increased the amount of capital employed, it appears that the investments that have been made simply do not provide a high return on capital.

In conclusion…

In conclusion, Mainova invested more capital in the business, but the return on that capital did not increase. Considering the stock has gained an impressive 72% over the past five years, investors must be thinking there are better things to come. Ultimately, if the underlying trends persist, we won’t be holding our breath that this is a multi-bagger going forward.

On a separate note, we found 1 warning sign for Mainova you will probably want to know more.

For those who like to invest in solid companies, look at this free list of companies with strong balance sheets and high returns on equity.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.