Nanofilm Technologies International (SGX:MZH) Might Be Having Difficulty Using Its Capital Effectively

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Nanofilm Technologies International (SGX:MZH) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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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. To calculate this metric for Nanofilm Technologies International, this is the formula:

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

0.016 = S$9.4m ÷ (S$635m - S$56m) (Based on the trailing twelve months to December 2024).

Thus, Nanofilm Technologies International has an ROCE of 1.6%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 7.9%.

See our latest analysis for Nanofilm Technologies International

In the above chart we have measured Nanofilm Technologies International's 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 Nanofilm Technologies International for free.

How Are Returns Trending?

On the surface, the trend of ROCE at Nanofilm Technologies International doesn't inspire confidence. To be more specific, ROCE has fallen from 23% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, Nanofilm Technologies International has decreased its current liabilities to 8.9% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Nanofilm Technologies International. These growth trends haven't led to growth returns though, since the stock has fallen 60% over the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Nanofilm Technologies International could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for MZH on our platform quite valuable.

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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.