Minth Group (HKG:425) Will Be Hoping To Turn Its Returns On Capital Around

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Minth Group (HKG:425) and its ROCE trend, we weren't exactly thrilled.

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. To calculate this metric for Minth Group, this is the formula:

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

0.088 = CN¥1.5b ÷ (CN¥27b - CN¥9.6b) (Based on the trailing twelve months to December 2020).

So, Minth Group has an ROCE of 8.8%. In absolute terms, that's a low return but it's around the Auto Components industry average of 8.4%.

See our latest analysis for Minth Group

Above you can see how the current ROCE for Minth Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Minth Group.

So How Is Minth Group's ROCE Trending?

On the surface, the trend of ROCE at Minth Group doesn't inspire confidence. Over the last five years, returns on capital have decreased to 8.8% from 14% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Minth Group's reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 72% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you want to continue researching Minth Group, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Minth Group 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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