Here's What's Concerning About Maxnerva Technology Services' (HKG:1037) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Maxnerva Technology Services (HKG:1037), we don't think it's current trends fit the mold of a multi-bagger.

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 Maxnerva Technology Services:

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

0.062 = CN¥29m ÷ (CN¥659m - CN¥187m) (Based on the trailing twelve months to June 2023).

So, Maxnerva Technology Services has an ROCE of 6.2%. On its own, that's a low figure but it's around the 6.6% average generated by the IT industry.

See our latest analysis for Maxnerva Technology Services

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

What Does the ROCE Trend For Maxnerva Technology Services Tell Us?

On the surface, the trend of ROCE at Maxnerva Technology Services doesn't inspire confidence. Over the last five years, returns on capital have decreased to 6.2% from 12% 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

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 Maxnerva Technology Services. However, despite the promising trends, the stock has fallen 69% over the last five years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One more thing to note, we've identified 1 warning sign with Maxnerva Technology Services and understanding this should be part of your investment process.

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.