There Are Reasons To Feel Uneasy About Marssenger Kitchenware's (SZSE:300894) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Marssenger Kitchenware (SZSE:300894) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Marssenger Kitchenware, this is the formula:

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

0.018 = CN¥35m ÷ (CN¥2.4b - CN¥431m) (Based on the trailing twelve months to September 2024).

Thus, Marssenger Kitchenware has an ROCE of 1.8%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 9.6%.

See our latest analysis for Marssenger Kitchenware

In the above chart we have measured Marssenger Kitchenware's 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 analyst report for Marssenger Kitchenware .

What Does the ROCE Trend For Marssenger Kitchenware Tell Us?

When we looked at the ROCE trend at Marssenger Kitchenware, we didn't gain much confidence. Around five years ago the returns on capital were 40%, but since then they've fallen to 1.8%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a related note, Marssenger Kitchenware has decreased its current liabilities to 18% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

In Conclusion...

In summary, we're somewhat concerned by Marssenger Kitchenware's diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 46% over the last three years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing: We've identified 4 warning signs with Marssenger Kitchenware (at least 2 which make us uncomfortable) , and understanding them would certainly be useful.

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

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

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.