Returns On Capital Are A Standout For MGM China Holdings (HKG:2282)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in MGM China Holdings' (HKG:2282) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

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 MGM China Holdings, this is the formula:

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

0.24 = HK$4.5b ÷ (HK$29b - HK$10b) (Based on the trailing twelve months to December 2023).

Therefore, MGM China Holdings has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Hospitality industry average of 4.3%.

See our latest analysis for MGM China Holdings

Above you can see how the current ROCE for MGM China Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering MGM China Holdings for free.

What Does the ROCE Trend For MGM China Holdings Tell Us?

We're pretty happy with how the ROCE has been trending at MGM China Holdings. The figures show that over the last five years, returns on capital have grown by 301%. The company is now earning HK$0.2 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 30% less capital than it was five years ago. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 35% of its operations, which isn't ideal. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

The Key Takeaway

In the end, MGM China Holdings has proven it's capital allocation skills are good with those higher returns from less amount of capital. Given the stock has declined 19% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

On a separate note, we've found 2 warning signs for MGM China Holdings you'll probably want to know about.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.