We Like These Underlying Return On Capital Trends At Meten Holding Group (NASDAQ:METX)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Meten Holding Group (NASDAQ:METX) and its trend of ROCE, we really liked what we saw.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Meten Holding Group:

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

0.054 = CN¥7.2m ÷ (CN¥209m - CN¥76m) (Based on the trailing twelve months to December 2022).

Therefore, Meten Holding Group has an ROCE of 5.4%. On its own, that's a low figure but it's around the 6.8% average generated by the Consumer Services industry.

Check out our latest analysis for Meten Holding Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Meten Holding Group's ROCE against it's prior returns. If you'd like to look at how Meten Holding Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Like most people, we're pleased that Meten Holding Group is now generating some pretax earnings. While the business is profitable now, it used to be incurring losses on invested capital three years ago. In regards to capital employed, Meten Holding Group is using 31% less capital than it was three years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. Meten Holding Group could be selling under-performing assets since the ROCE is improving.

On a related note, the company's ratio of current liabilities to total assets has decreased to 36%, which basically reduces it's funding from the likes of short-term creditors or suppliers. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

What We Can Learn From Meten Holding Group's ROCE

In summary, it's great to see that Meten Holding Group has been able to turn things around and earn higher returns on lower amounts of capital. Although the company may be facing some issues elsewhere since the stock has plunged 100% in the last three years. Still, it's worth doing some further research to see if the trends will continue into the future.

On a separate note, we've found 2 warning signs for Meten Holding Group you'll probably want to know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.