Investors Could Be Concerned With MOS House Group's (HKG:1653) Returns On 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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. Although, when we looked at MOS House Group (HKG:1653), it didn't seem to tick all of these boxes.

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. To calculate this metric for MOS House Group, this is the formula:

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

0.048 = HK$7.0m ÷ (HK$280m - HK$134m) (Based on the trailing twelve months to March 2022).

So, MOS House Group has an ROCE of 4.8%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 9.8%.

Check out our latest analysis for MOS House Group

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

What Does the ROCE Trend For MOS House Group Tell Us?

On the surface, the trend of ROCE at MOS House Group doesn't inspire confidence. Around five years ago the returns on capital were 44%, but since then they've fallen to 4.8%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, MOS House Group has decreased its current liabilities to 48% 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. 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. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

What We Can Learn From MOS House Group's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for MOS House Group. However, despite the promising trends, the stock has fallen 66% over the last three years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One more thing: We've identified 3 warning signs with MOS House Group (at least 2 which are potentially serious) , and understanding them would certainly be useful.

While MOS House Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.