Mulsanne Group Holding (HKG:1817) 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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Mulsanne Group Holding (HKG:1817), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Mulsanne Group Holding:

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

0.0097 = CN¥14m ÷ (CN¥3.0b - CN¥1.5b) (Based on the trailing twelve months to June 2023).

So, Mulsanne Group Holding has an ROCE of 1.0%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 9.9%.

See 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'd like to look at how Mulsanne Group Holding has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Mulsanne Group Holding Tell Us?

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 1.0% from 46% five years ago. However it looks like Mulsanne Group Holding 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 separate but related note, it's important to know that Mulsanne Group Holding has a current liabilities to total assets ratio of 51%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Mulsanne Group Holding's ROCE

Bringing it all together, while we're somewhat encouraged by Mulsanne Group Holding's reinvestment in its own business, we're aware that returns are shrinking. And investors may be expecting the fundamentals to get a lot worse because the stock has crashed 81% over the last three years. 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.

On a separate note, we've found 3 warning signs for Mulsanne Group Holding you'll probably want to know about.

While Mulsanne Group Holding 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.