The Returns On Capital At MBV International (HKG:1957) Don't Inspire Confidence

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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at MBV International (HKG:1957) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

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 MBV International:

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

0.15 = RM30m ÷ (RM242m - RM40m) (Based on the trailing twelve months to December 2023).

Thus, MBV International has an ROCE of 15%. That's a relatively normal return on capital, and it's around the 13% generated by the Retail Distributors industry.

View our latest analysis for MBV International

Historical performance is a great place to start when researching a stock so above you can see the gauge for MBV International's ROCE against it's prior returns. If you'd like to look at how MBV International has performed in the past in other metrics, you can view this free graph of MBV International's past earnings, revenue and cash flow.

So How Is MBV International's ROCE Trending?

When we looked at the ROCE trend at MBV International, we didn't gain much confidence. To be more specific, ROCE has fallen from 34% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, MBV International has decreased its current liabilities to 17% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On MBV International's ROCE

Bringing it all together, while we're somewhat encouraged by MBV International's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 31% over the last three years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

On a separate note, we've found 2 warning signs for MBV International you'll probably want to know about.

While MBV International isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.

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