MECOM Power and Construction (HKG:1183) May Have Issues Allocating Its Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. However, after briefly looking over the numbers, we don't think MECOM Power and Construction (HKG:1183) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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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 MECOM Power and Construction is:

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

0.021 = MO$12m ÷ (MO$1.1b - MO$563m) (Based on the trailing twelve months to December 2024).

So, MECOM Power and Construction has an ROCE of 2.1%. Ultimately, that's a low return and it under-performs the Construction industry average of 5.5%.

Check out our latest analysis for MECOM Power and Construction

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'd like to look at how MECOM Power and Construction has performed in the past in other metrics, you can view this free graph of MECOM Power and Construction's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at MECOM Power and Construction doesn't inspire confidence. Around five years ago the returns on capital were 13%, but since then they've fallen to 2.1%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 49%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 2.1%. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

The Bottom Line On MECOM Power and Construction's ROCE

Bringing it all together, while we're somewhat encouraged by MECOM Power and Construction's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 49% in the last five years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

One more thing: We've identified 4 warning signs with MECOM Power and Construction (at least 3 which are significant) , and understanding them would certainly be useful.

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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.