Returns Are Gaining Momentum At Maxnerva Technology Services (HKG:1037)

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Maxnerva Technology Services' (HKG:1037) returns on capital, so let's have a look.

Understanding 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)

0.076 = 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%. On its own, that's a low figure but it's around the 7.1% average generated by the IT industry.

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.

How Are Returns Trending?

We're delighted to see that Maxnerva Technology Services is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 7.6% on its capital. 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. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. 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.

The Bottom Line On Maxnerva Technology Services' ROCE

In summary, it's great to see that Maxnerva Technology Services has managed to break into profitability and is continuing to reinvest in its business. And since the stock has dived 76% over the last five years, there may be other factors affecting the company's prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

Like most companies, Maxnerva Technology Services does come with some risks, and we've found 4 warning signs that you should be aware of.

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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