Capital Allocation Trends At Migao Group Holdings (HKG:9879) Aren't Ideal

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Migao Group Holdings (HKG:9879), we don't think it's current trends fit the mold of a multi-bagger.

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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. Analysts use this formula to calculate it for Migao Group Holdings:

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

0.13 = CN¥379m ÷ (CN¥4.3b - CN¥1.5b) (Based on the trailing twelve months to September 2024).

Thus, Migao Group Holdings has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 6.9% generated by the Chemicals industry.

Check out our latest analysis for Migao Group Holdings

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

What Can We Tell From Migao Group Holdings' ROCE Trend?

On the surface, the trend of ROCE at Migao Group Holdings doesn't inspire confidence. Around three years ago the returns on capital were 30%, but since then they've fallen to 13%. However it looks like Migao Group 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 may take some time before the company starts to see any change in earnings from these investments.

On a related note, Migao Group Holdings has decreased its current liabilities to 35% 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.

The Bottom Line On Migao Group Holdings' ROCE

To conclude, we've found that Migao Group Holdings is reinvesting in the business, but returns have been falling. And in the last year, the stock has given away 15% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

One more thing to note, we've identified 2 warning signs with Migao Group Holdings and understanding these should be part of your investment process.

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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.