Mao Bao (TWSE:1732) May Have Issues Allocating Its Capital

When researching a stock for investment, what can tell us that the company is in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. So after we looked into Mao Bao (TWSE:1732), the trends above didn't look too great.

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 Mao Bao, this is the formula:

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

0.016 = NT$8.3m ÷ (NT$635m - NT$115m) (Based on the trailing twelve months to September 2024).

Thus, Mao Bao has an ROCE of 1.6%. Ultimately, that's a low return and it under-performs the Household Products industry average of 13%.

See our latest analysis for Mao Bao

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're interested in investigating Mao Bao's past further, check out this free graph covering Mao Bao's past earnings, revenue and cash flow.

What Can We Tell From Mao Bao's ROCE Trend?

We are a bit worried about the trend of returns on capital at Mao Bao. Unfortunately the returns on capital have diminished from the 5.6% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Mao Bao becoming one if things continue as they have.

What We Can Learn From Mao Bao's ROCE

In summary, it's unfortunate that Mao Bao is generating lower returns from the same amount of capital. Since the stock has skyrocketed 161% over the last five years, it looks like investors have high expectations of the stock. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One more thing: We've identified 2 warning signs with Mao Bao (at least 1 which is a bit concerning) , and understanding them would certainly be useful.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.