Mulsanne Group Holding's (HKG:1817) Returns On Capital Tell Us There Is Reason To Feel Uneasy

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. On that note, looking into Mulsanne Group Holding (HKG:1817), we weren't too upbeat about how things were going.

What Is 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)

0.069 = CN¥69m ÷ (CN¥3.1b - CN¥2.1b) (Based on the trailing twelve months to June 2024).

So, Mulsanne Group Holding has an ROCE of 6.9%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 8.9%.

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Mulsanne Group Holding.

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

In terms of Mulsanne Group Holding's historical ROCE trend, it isn't fantastic. The company used to generate 25% on its capital five years ago but it has since fallen noticeably. What's equally concerning is that the amount of capital deployed in the business has shrunk by 52% over that same period. The fact that both are shrinking is an indication that the business is going through some tough times. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

On a side note, Mulsanne Group Holding's current liabilities have increased over the last five years to 68% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

The Key Takeaway

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. We expect this has contributed to the stock plummeting 93% during the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Mulsanne Group Holding does have some risks, we noticed 5 warning signs (and 2 which don't sit too well with us) we think you should 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.