To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Minshang Creative Technology Holdings (HKG:1632) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Return On Capital Employed (ROCE): What is it?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Minshang Creative Technology Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.028 = HK$4.8m ÷ (HK$560m - HK$387m) (Based on the trailing twelve months to March 2021).
So, Minshang Creative Technology Holdings has an ROCE of 2.8%. In absolute terms, that's a low return but it's around the Hospitality industry average of 2.4%.
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're interested in investigating Minshang Creative Technology Holdings' past further, check out this free graph of past earnings, revenue and cash flow.
So How Is Minshang Creative Technology Holdings' ROCE Trending?
In terms of Minshang Creative Technology Holdings' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 51% over the last five years. 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.
While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 69%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 2.8%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.
The Bottom Line On Minshang Creative Technology Holdings' ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Minshang Creative Technology Holdings. These growth trends haven't led to growth returns though, since the stock has fallen 69% over the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
Like most companies, Minshang Creative Technology Holdings does come with some risks, and we've found 2 warning signs that you should be aware of.
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.
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.
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