Mehow Innovative (SZSE:301363) Will Be Hoping To Turn Its Returns On Capital Around

There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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 Mehow Innovative (SZSE:301363) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Mehow Innovative is:

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

0.10 = CN¥339m ÷ (CN¥3.5b - CN¥255m) (Based on the trailing twelve months to September 2023).

Thus, Mehow Innovative has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 8.2% generated by the Medical Equipment industry.

See our latest analysis for Mehow Innovative

In the above chart we have measured Mehow Innovative's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Mehow Innovative for free.

What Does the ROCE Trend For Mehow Innovative Tell Us?

In terms of Mehow Innovative's historical ROCE movements, the trend isn't fantastic. Over the last four years, returns on capital have decreased to 10% from 26% four years ago. However it looks like Mehow Innovative might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

To conclude, we've found that Mehow Innovative is reinvesting in the business, but returns have been falling. And in the last year, the stock has given away 36% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Mehow Innovative has the makings of a multi-bagger.

On a final note, we've found 1 warning sign for Mehow Innovative that we think you should be aware of.

While Mehow Innovative 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.