Maike Tube Industry Holdings (HKG:1553) May Have Issues Allocating Its Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Maike Tube Industry Holdings (HKG:1553), we don't think it's current trends fit the mold of a multi-bagger.

What Is 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. To calculate this metric for Maike Tube Industry Holdings, this is the formula:

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

0.14 = CN¥145m ÷ (CN¥1.5b - CN¥523m) (Based on the trailing twelve months to June 2023).

Thus, Maike Tube Industry Holdings has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Metals and Mining industry average of 8.7% it's much better.

See our latest analysis for Maike Tube Industry Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Maike Tube Industry Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Maike Tube Industry Holdings, check out these free graphs here.

What Can We Tell From Maike Tube Industry Holdings' ROCE Trend?

On the surface, the trend of ROCE at Maike Tube Industry Holdings doesn't inspire confidence. To be more specific, ROCE has fallen from 37% over the last five years. However it looks like Maike Tube Industry Holdings 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Maike Tube Industry Holdings has done well to pay down its current liabilities to 34% of total assets. So we could link some of this to the decrease in ROCE. 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Maike Tube Industry Holdings' ROCE

In summary, Maike Tube Industry Holdings is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 25% over the last three years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Maike Tube Industry Holdings has the makings of a multi-bagger.

If you want to continue researching Maike Tube Industry Holdings, you might be interested to know about the 2 warning signs that our analysis has discovered.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.