If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. However, after briefly looking over the numbers, we don't think MYT Netherlands Parent B.V (NYSE:MYTE) 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)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for MYT Netherlands Parent B.V:

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

0.01 = €4.7m ÷ (€716m - €259m) (Based on the trailing twelve months to December 2024).

So, MYT Netherlands Parent B.V has an ROCE of 1.0%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 13%.

View our latest analysis for MYT Netherlands Parent B.V

In the above chart we have measured MYT Netherlands Parent B.V's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for MYT Netherlands Parent B.V .

What Can We Tell From MYT Netherlands Parent B.V's ROCE Trend?

On the surface, the trend of ROCE at MYT Netherlands Parent B.V doesn't inspire confidence. Over the last five years, returns on capital have decreased to 1.0% from 8.9% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 36%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 1.0%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

The Bottom Line On MYT Netherlands Parent B.V's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for MYT Netherlands Parent B.V. However, despite the promising trends, the stock has fallen 14% over the last three years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One more thing to note, we've identified 2 warning signs with MYT Netherlands Parent B.V and understanding these should be part of your investment process.

While MYT Netherlands Parent B.V isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.