Be Wary Of Mulsanne Group Holding (HKG:1817) And Its Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Mulsanne Group Holding (HKG:1817) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 Mulsanne Group Holding, this is the formula:

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

0.015 = CN¥22m ÷ (CN¥3.5b - CN¥2.1b) (Based on the trailing twelve months to December 2022).

Therefore, Mulsanne Group Holding has an ROCE of 1.5%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 9.0%.

Check out our latest analysis for Mulsanne Group Holding

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

What Can We Tell From Mulsanne Group Holding's ROCE Trend?

When we looked at the ROCE trend at Mulsanne Group Holding, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 1.5% from 52% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, Mulsanne Group Holding's current liabilities are still rather high at 60% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Mulsanne Group Holding's ROCE

We're a bit apprehensive about Mulsanne Group Holding because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Long term shareholders who've owned the stock over the last three years have experienced a 63% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you want to continue researching Mulsanne Group Holding, you might be interested to know about the 2 warning signs that our analysis has discovered.

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.