Maxnerva Technology Services (HKG:1037) Shareholders Will Want The ROCE Trajectory To Continue

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Maxnerva Technology Services (HKG:1037) so let's look a bit deeper.

Return On Capital Employed (ROCE): What is it?

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. To calculate this metric for Maxnerva Technology Services, this is the formula:

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

0.076 = CN¥28m ÷ (CN¥536m - CN¥165m) (Based on the trailing twelve months to December 2020).

Thus, Maxnerva Technology Services has an ROCE of 7.6%. Even though it's in line with the industry average of 8.0%, it's still a low return by itself.

Check out 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'd like to look at how Maxnerva Technology Services has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Maxnerva Technology Services' ROCE Trending?

We're delighted to see that Maxnerva Technology Services is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 7.6% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Maxnerva Technology Services is utilizing 71% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 31% of its operations, which isn't ideal. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

Our Take On Maxnerva Technology Services' ROCE

To the delight of most shareholders, Maxnerva Technology Services has now broken into profitability. However the stock is down a substantial 83% in the last five years so there could be other areas of the business hurting its prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

On a separate note, we've found 4 warning signs for Maxnerva Technology Services you'll probably want to know about.

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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