Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Although, when we looked at Mulsanne Group Holding (HKG:1817), 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. The formula for this calculation on Mulsanne Group Holding is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = CN¥184m ÷ (CN¥3.1b - CN¥1.3b) (Based on the trailing twelve months to June 2021).
Therefore, Mulsanne Group Holding has an ROCE of 10%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Specialty Retail industry average of 12%.
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.
How Are Returns Trending?
In terms of Mulsanne Group Holding's historical ROCE movements, the trend isn't fantastic. Over the last four years, returns on capital have decreased to 10% from 53% four 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'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, Mulsanne Group Holding has done well to pay down its current liabilities to 42% of total assets. That could partly explain why the ROCE has dropped. 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. 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 Mulsanne Group Holding's ROCE
To conclude, we've found that Mulsanne Group Holding is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 7.7% over the last year. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
Mulsanne Group Holding does have some risks though, and we've spotted 2 warning signs for Mulsanne Group Holding that you might be interested in.
While Mulsanne Group Holding isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.