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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of MercadoLibre (NASDAQ:MELI) looks great, so lets see what the trend can tell us.

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. To calculate this metric for MercadoLibre, this is the formula:

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

0.25 = US$2.1b ÷ (US$23b - US$14b) (Based on the trailing twelve months to September 2024).

So, MercadoLibre has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Multiline Retail industry average of 13%.

View our latest analysis for MercadoLibre

Above you can see how the current ROCE for MercadoLibre compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for MercadoLibre .

The Trend Of ROCE

MercadoLibre has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 25% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, MercadoLibre is utilizing 172% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 63% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

Our Take On MercadoLibre's ROCE

To the delight of most shareholders, MercadoLibre has now broken into profitability. Since the stock has returned a staggering 269% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if MercadoLibre can keep these trends up, it could have a bright future ahead.