Returns On Capital Signal Tricky Times Ahead For Mega Genomics (HKG:6667)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after investigating Mega Genomics (HKG:6667), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Mega Genomics is:

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

0.039 = CN¥26m ÷ (CN¥797m - CN¥114m) (Based on the trailing twelve months to December 2023).

So, Mega Genomics has an ROCE of 3.9%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 10%.

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Mega Genomics.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Mega Genomics doesn't inspire confidence. Over the last four years, returns on capital have decreased to 3.9% from 21% four years ago. However it looks like Mega Genomics might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Mega Genomics' ROCE

Bringing it all together, while we're somewhat encouraged by Mega Genomics' reinvestment in its own business, we're aware that returns are shrinking. Additionally, the stock's total return to shareholders over the last year has been flat, which isn't too surprising. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

On a final note, we've found 1 warning sign for Mega Genomics that we think you should be aware of.

While Mega Genomics 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.