Metasurface Technologies Holdings (HKG:8637) Could Be Struggling To Allocate Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 Metasurface Technologies Holdings (HKG:8637) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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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. To calculate this metric for Metasurface Technologies Holdings, this is the formula:

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

0.075 = S$4.9m ÷ (S$77m - S$12m) (Based on the trailing twelve months to December 2024).

So, Metasurface Technologies Holdings has an ROCE of 7.5%. Even though it's in line with the industry average of 7.7%, it's still a low return by itself.

See our latest analysis for Metasurface Technologies Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Metasurface Technologies Holdings' ROCE against it's prior returns. If you're interested in investigating Metasurface Technologies Holdings' past further, check out this free graph covering Metasurface Technologies Holdings' past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Metasurface Technologies Holdings' historical ROCE movements, the trend isn't fantastic. Around two years ago the returns on capital were 13%, but since then they've fallen to 7.5%. However it looks like Metasurface Technologies Holdings 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'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.

On a side note, Metasurface Technologies Holdings has done well to pay down its current liabilities to 15% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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 Metasurface Technologies Holdings' ROCE

Bringing it all together, while we're somewhat encouraged by Metasurface Technologies Holdings' reinvestment in its own business, we're aware that returns are shrinking. And in the last year, the stock has given away 28% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you want to know some of the risks facing Metasurface Technologies Holdings we've found 2 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

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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.