Mega Genomics (HKG:6667) Will Be Hoping To Turn Its Returns On Capital Around

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. 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 Mega Genomics (HKG:6667) and its ROCE trend, we weren't exactly thrilled.

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. To calculate this metric for Mega Genomics, this is the formula:

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

0.046 = CN¥32m ÷ (CN¥832m - CN¥131m) (Based on the trailing twelve months to June 2024).

Thus, Mega Genomics has an ROCE of 4.6%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 8.2%.

See our latest analysis for Mega Genomics

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

What Does the ROCE Trend For Mega Genomics Tell Us?

On the surface, the trend of ROCE at Mega Genomics doesn't inspire confidence. Around four years ago the returns on capital were 38%, but since then they've fallen to 4.6%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Mega Genomics has decreased its current liabilities to 16% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

In summary, Mega Genomics is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 29% in the last year. Therefore based on the analysis done in this article, we don't think Mega Genomics has the makings of a multi-bagger.

One final note, you should learn about the 3 warning signs we've spotted with Mega Genomics (including 1 which is concerning) .

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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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.