Here's What's Concerning About Maiyue Technology's (HKG:2501) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Maiyue Technology (HKG:2501) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for Maiyue Technology:

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

0.097 = CN¥32m ÷ (CN¥563m - CN¥237m) (Based on the trailing twelve months to June 2024).

Therefore, Maiyue Technology has an ROCE of 9.7%. On its own that's a low return, but compared to the average of 6.1% generated by the IT industry, it's much better.

See our latest analysis for Maiyue Technology

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Maiyue Technology has performed in the past in other metrics, you can view this free graph of Maiyue Technology's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of Maiyue Technology's historical ROCE movements, the trend isn't fantastic. Over the last three years, returns on capital have decreased to 9.7% from 35% three years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Maiyue Technology has done well to pay down its current liabilities to 42% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Keep in mind 42% is still pretty high, so those risks are still somewhat prevalent.

The Bottom Line

To conclude, we've found that Maiyue Technology is reinvesting in the business, but returns have been falling. Additionally, the stock's total return to shareholders over the last year has been flat, which isn't too surprising. Therefore based on the analysis done in this article, we don't think Maiyue Technology has the makings of a multi-bagger.

Maiyue Technology does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those are significant...

While Maiyue Technology isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.