Capital Allocation Trends At MCLON JEWELLERYLtd (SZSE:300945) Aren't Ideal

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at MCLON JEWELLERYLtd (SZSE:300945) 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 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. The formula for this calculation on MCLON JEWELLERYLtd is:

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

0.046 = CN¥73m ÷ (CN¥1.7b - CN¥133m) (Based on the trailing twelve months to June 2024).

Thus, MCLON JEWELLERYLtd has an ROCE of 4.6%. Ultimately, that's a low return and it under-performs the Luxury industry average of 6.1%.

View our latest analysis for MCLON JEWELLERYLtd

Above you can see how the current ROCE for MCLON JEWELLERYLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for MCLON JEWELLERYLtd .

What Does the ROCE Trend For MCLON JEWELLERYLtd Tell Us?

We weren't thrilled with the trend because MCLON JEWELLERYLtd's ROCE has reduced by 74% over the last five years, while the business employed 258% more capital. That being said, MCLON JEWELLERYLtd raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence MCLON JEWELLERYLtd might not have received a full period of earnings contribution from it. Additionally, we found that MCLON JEWELLERYLtd's most recent EBIT figure is around the same as the prior year, so we'd attribute the drop in ROCE mostly to the capital raise.

In Conclusion...

While returns have fallen for MCLON JEWELLERYLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These growth trends haven't led to growth returns though, since the stock has fallen 43% over the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One more thing, we've spotted 1 warning sign facing MCLON JEWELLERYLtd that you might find interesting.

While MCLON JEWELLERYLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.