Maxnerva Technology Services' (HKG:1037) Returns On Capital Not Reflecting Well On The Business

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. 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.

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 Maxnerva Technology Services:

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

0.019 = CN¥8.2m ÷ (CN¥656m - CN¥223m) (Based on the trailing twelve months to June 2022).

So, Maxnerva Technology Services has an ROCE of 1.9%. Ultimately, that's a low return and it under-performs the IT industry average of 6.0%.

View 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.

So How Is Maxnerva Technology Services' ROCE Trending?

When we looked at the ROCE trend at Maxnerva Technology Services, we didn't gain much confidence. Around five years ago the returns on capital were 32%, but since then they've fallen to 1.9%. 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.

What We Can Learn From Maxnerva Technology Services' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Maxnerva Technology Services is reinvesting for growth and has higher sales as a result. Despite these promising trends, the stock has collapsed 83% over the last five years, so there could be other factors hurting the company's prospects. Regardless, reinvestment can pay off in the long run, so we think astute investors may want to look further into this stock.

If you'd like to know more about Maxnerva Technology Services, we've spotted 3 warning signs, and 1 of them is potentially serious.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.