Returns On Capital Signal Tricky Times Ahead For MOG Holdings (HKG:1942)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. However, after briefly looking over the numbers, we don't think MOG Holdings (HKG:1942) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on MOG Holdings is:

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

0.08 = RM11m ÷ (RM165m - RM30m) (Based on the trailing twelve months to March 2021).

So, MOG Holdings has an ROCE of 8.0%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 11%.

See our latest analysis for MOG Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for MOG Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of MOG Holdings, check out these free graphs here.

How Are Returns Trending?

On the surface, the trend of ROCE at MOG Holdings doesn't inspire confidence. Around four years ago the returns on capital were 31%, but since then they've fallen to 8.0%. And considering revenue has dropped while employing more capital, we'd be cautious. 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, MOG Holdings has done well to pay down its current liabilities to 18% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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.

What We Can Learn From MOG Holdings' ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for MOG Holdings have fallen, meanwhile the business is employing more capital than it was four years ago. Yet despite these concerning fundamentals, the stock has performed strongly with a 44% return over the last year, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for MOG Holdings (of which 1 makes us a bit uncomfortable!) that you should know about.

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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