The Returns On Capital At MCLON JEWELLERYLtd (SZSE:300945) Don't Inspire Confidence

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 MCLON JEWELLERYLtd (SZSE:300945) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

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 MCLON JEWELLERYLtd, this is the formula:

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

0.05 = CN¥80m ÷ (CN¥1.7b - CN¥154m) (Based on the trailing twelve months to March 2024).

Thus, MCLON JEWELLERYLtd has an ROCE of 5.0%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 6.6%.

View our latest analysis for MCLON JEWELLERYLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating MCLON JEWELLERYLtd's past further, check out this free graph covering MCLON JEWELLERYLtd's past earnings, revenue and cash flow.

How Are Returns Trending?

We weren't thrilled with the trend because MCLON JEWELLERYLtd's ROCE has reduced by 71% over the last five years, while the business employed 273% 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. MCLON JEWELLERYLtd probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

On a related note, MCLON JEWELLERYLtd has decreased its current liabilities to 8.8% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On MCLON JEWELLERYLtd's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that MCLON JEWELLERYLtd 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 54% 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.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for MCLON JEWELLERYLtd (of which 1 is potentially serious!) that you should know about.

While MCLON JEWELLERYLtd 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.