Some Investors May Be Worried About Maxvision Technology's (SZSE:002990) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Maxvision Technology (SZSE:002990), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Maxvision Technology is:

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

0.062 = CN¥145m ÷ (CN¥3.4b - CN¥1.1b) (Based on the trailing twelve months to September 2023).

Therefore, Maxvision Technology has an ROCE of 6.2%. In absolute terms, that's a low return but it's around the Electronic industry average of 5.3%.

See our latest analysis for Maxvision Technology

Above you can see how the current ROCE for Maxvision Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Maxvision Technology for free.

The Trend Of ROCE

On the surface, the trend of ROCE at Maxvision Technology doesn't inspire confidence. Around five years ago the returns on capital were 35%, but since then they've fallen to 6.2%. 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. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Maxvision Technology has decreased its current liabilities to 32% 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.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Maxvision Technology. These growth trends haven't led to growth returns though, since the stock has fallen 17% over the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Maxvision Technology could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 002990 on our platform quite valuable.

While Maxvision Technology 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.