Returns On Capital At Ming Yuan Cloud Group Holdings (HKG:909) Paint A Concerning Picture

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Ming Yuan Cloud Group Holdings (HKG:909) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Ming Yuan Cloud Group Holdings is:

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

0.039 = CN¥257m ÷ (CN¥7.5b - CN¥847m) (Based on the trailing twelve months to June 2021).

Therefore, Ming Yuan Cloud Group Holdings has an ROCE of 3.9%. In absolute terms, that's a low return and it also under-performs the Software industry average of 7.3%.

View our latest analysis for Ming Yuan Cloud Group Holdings

In the above chart we have measured Ming Yuan Cloud Group Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Ming Yuan Cloud Group Holdings here for free.

What The Trend Of ROCE Can Tell Us

In terms of Ming Yuan Cloud Group Holdings' historical ROCE movements, the trend isn't fantastic. Around three years ago the returns on capital were 37%, but since then they've fallen to 3.9%. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, Ming Yuan Cloud Group Holdings has decreased its current liabilities to 11% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that Ming Yuan Cloud Group Holdings is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 65% in the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Ming Yuan Cloud Group Holdings does have some risks though, and we've spotted 1 warning sign for Ming Yuan Cloud Group Holdings that you might be interested in.

While Ming Yuan Cloud Group Holdings 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. 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.