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There Are Reasons To Feel Uneasy About Mesa Laboratories' (NASDAQ:MLAB) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Mesa Laboratories (NASDAQ:MLAB) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Mesa Laboratories:

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

0.022 = US$13m ÷ (US$622m - US$28m) (Based on the trailing twelve months to December 2020).

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So, Mesa Laboratories has an ROCE of 2.2%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 9.9%.

Check out our latest analysis for Mesa Laboratories

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In the above chart we have measured Mesa Laboratories' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

The trend of ROCE doesn't look fantastic because it's fallen from 12% five years ago, while the business's capital employed increased by 342%. Usually this isn't ideal, but given Mesa Laboratories conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. Mesa Laboratories probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Mesa Laboratories. And long term investors must be optimistic going forward because the stock has returned a huge 144% to shareholders in the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

Mesa Laboratories does have some risks though, and we've spotted 3 warning signs for Mesa Laboratories that you might be interested in.

While Mesa Laboratories isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

This article by Simply Wall St is general in nature. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.