If you're looking for a multi-bagger, there's a few things to 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Maxnerva Technology Services (HKG:1037) so let's look a bit deeper.
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 Maxnerva Technology Services is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.044 = CN¥17m ÷ (CN¥560m - CN¥181m) (Based on the trailing twelve months to June 2020).
Therefore, Maxnerva Technology Services has an ROCE of 4.4%. In absolute terms, that's a low return and it also under-performs the IT industry average of 8.6%.
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're interested in investigating Maxnerva Technology Services' past further, check out this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The data shows that returns on capital have increased substantially over the last five years to 4.4%. Basically the business is earning more per dollar of capital invested and in addition to that, 153% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 32%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see.
The Bottom Line On Maxnerva Technology Services' ROCE
To sum it up, Maxnerva Technology Services has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And since the stock has dived 85% over the last five years, there may be other factors affecting the company's prospects. Still, it's worth doing some further research to see if the trends will continue into the future.
Like most companies, Maxnerva Technology Services does come with some risks, and we've found 3 warning signs that you should be aware of.
While Maxnerva Technology Services 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.
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This article by Simply Wall St is general in nature. 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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