Minth Group (HKG:425) Will Be Hoping To Turn Its Returns On Capital Around

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. Having said that, from a first glance at Minth Group (HKG:425) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Minth Group, this is the formula:

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

0.084 = CN¥2.0b ÷ (CN¥38b - CN¥14b) (Based on the trailing twelve months to December 2023).

Thus, Minth Group has an ROCE of 8.4%. In absolute terms, that's a low return, but it's much better than the Auto Components industry average of 6.3%.

View our latest analysis for Minth Group

In the above chart we have measured Minth Group'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 Minth Group .

What Can We Tell From Minth Group's ROCE Trend?

When we looked at the ROCE trend at Minth Group, we didn't gain much confidence. Around five years ago the returns on capital were 14%, but since then they've fallen to 8.4%. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line On Minth Group's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Minth Group is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 47% over the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Minth Group could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 425 on our platform quite valuable.

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.