Stock Analysis

MBV International (HKG:1957) May Have Issues Allocating Its Capital

SEHK:1957
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If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. In light of that, when we looked at MBV International (HKG:1957) and its ROCE trend, we weren't exactly thrilled.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for MBV International:

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

0.12 = RM22m ÷ (RM186m - RM7.3m) (Based on the trailing twelve months to December 2022).

Thus, MBV International has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 4.4% generated by the Retail Distributors industry.

View our latest analysis for MBV International

roce
SEHK:1957 Return on Capital Employed June 9th 2023

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating MBV International's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is MBV International's ROCE Trending?

In terms of MBV International's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 12% from 27% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, MBV International has done well to pay down its current liabilities to 3.9% 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. 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.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for MBV International. And there could be an opportunity here if other metrics look good too, because the stock has declined 29% in the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

MBV International does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is significant...

While MBV International 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.

Valuation is complex, but we're helping make it simple.

Find out whether MBV International is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.