MEGAIN Holding (Cayman) (HKG:6939) May Have Issues Allocating Its Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at MEGAIN Holding (Cayman) (HKG:6939) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

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 MEGAIN Holding (Cayman):

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

0.048 = CN¥18m ÷ (CN¥390m - CN¥19m) (Based on the trailing twelve months to December 2023).

So, MEGAIN Holding (Cayman) has an ROCE of 4.8%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 8.8%.

Check out our latest analysis for MEGAIN Holding (Cayman)

Historical performance is a great place to start when researching a stock so above you can see the gauge for MEGAIN Holding (Cayman)'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 MEGAIN Holding (Cayman).

How Are Returns Trending?

On the surface, the trend of ROCE at MEGAIN Holding (Cayman) doesn't inspire confidence. Over the last five years, returns on capital have decreased to 4.8% from 51% five years ago. However it looks like MEGAIN Holding (Cayman) 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 related note, MEGAIN Holding (Cayman) has decreased its current liabilities to 4.8% of total assets. So we could link some of this to the decrease in ROCE. 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.

What We Can Learn From MEGAIN Holding (Cayman)'s ROCE

To conclude, we've found that MEGAIN Holding (Cayman) is reinvesting in the business, but returns have been falling. And in the last three years, the stock has given away 67% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think MEGAIN Holding (Cayman) has the makings of a multi-bagger.

If you'd like to know more about MEGAIN Holding (Cayman), we've spotted 5 warning signs, and 2 of them are significant.

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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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.