Capital Allocation Trends At M.J. International (TPE:8466) Aren't Ideal

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at M.J. International (TPE:8466) 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 M.J. International is:

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

0.10 = NT$405m ÷ (NT$4.5b - NT$643m) (Based on the trailing twelve months to December 2020).

So, M.J. International has an ROCE of 10%. That's a relatively normal return on capital, and it's around the 12% generated by the Consumer Durables industry.

Check out our latest analysis for M.J. International

Historical performance is a great place to start when researching a stock so above you can see the gauge for M.J. International's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of M.J. International, check out these free graphs here.

What Does the ROCE Trend For M.J. International Tell Us?

In terms of M.J. International's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 10% from 26% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, M.J. International has done well to pay down its current liabilities to 14% 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. 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.

In Conclusion...

In summary, we're somewhat concerned by M.J. International's diminishing returns on increasing amounts of capital. And, the stock has remained flat over the last three years, so investors don't seem too impressed either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing: We've identified 3 warning signs with M.J. International (at least 1 which is concerning) , and understanding them would certainly be useful.

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

When trading M.J. International or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.