Meituan (HKG:3690) Is Experiencing Growth In Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. So on that note, Meituan (HKG:3690) looks quite promising in regards to its trends of return on capital.

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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. Analysts use this formula to calculate it for Meituan:

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

0.15 = CN¥33b ÷ (CN¥324b - CN¥108b) (Based on the trailing twelve months to December 2024).

Therefore, Meituan has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 7.0% generated by the Hospitality industry.

View our latest analysis for Meituan

In the above chart we have measured Meituan's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Meituan .

What Does the ROCE Trend For Meituan Tell Us?

We're delighted to see that Meituan is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 15% on its capital. Not only that, but the company is utilizing 127% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

What We Can Learn From Meituan's ROCE

Overall, Meituan gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 62% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation for 3690 on our platform that is definitely worth checking out.

While Meituan isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.