Here's What's Concerning About Minshang Creative Technology Holdings' (HKG:1632) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Minshang Creative Technology Holdings (HKG:1632) 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. Analysts use this formula to calculate it for Minshang Creative Technology Holdings:

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

0.02 = HK$3.5m ÷ (HK$560m - HK$387m) (Based on the trailing twelve months to March 2021).

So, Minshang Creative Technology Holdings has an ROCE of 2.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 2.0%.

View our latest analysis for Minshang Creative Technology Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Minshang Creative Technology Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Minshang Creative Technology Holdings, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

In terms of Minshang Creative Technology Holdings' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 51%, but since then they've fallen to 2.0%. 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 side note, Minshang Creative Technology Holdings' current liabilities have increased over the last five years to 69% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. 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.

In Conclusion...

While returns have fallen for Minshang Creative Technology Holdings in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. Despite these promising trends, the stock has collapsed 75% over the last three years, so there could be other factors hurting the company's prospects. Regardless, reinvestment can pay off in the long run, so we think astute investors may want to look further into this stock.

If you want to continue researching Minshang Creative Technology Holdings, you might be interested to know about the 2 warning signs that our analysis has discovered.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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