Some Investors May Be Worried About MicroAlgo's (NASDAQ:MLGO) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at MicroAlgo (NASDAQ:MLGO), it didn't seem to tick all of these boxes.

Our free stock report includes 4 warning signs investors should be aware of before investing in MicroAlgo. Read for free now.

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. Analysts use this formula to calculate it for MicroAlgo:

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

0.019 = CN¥20m ÷ (CN¥1.3b - CN¥207m) (Based on the trailing twelve months to December 2024).

So, MicroAlgo has an ROCE of 1.9%. In absolute terms, that's a low return and it also under-performs the IT industry average of 9.4%.

View our latest analysis for MicroAlgo

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of MicroAlgo.

The Trend Of ROCE

We weren't thrilled with the trend because MicroAlgo's ROCE has reduced by 92% over the last five years, while the business employed 379% more capital. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with MicroAlgo's earnings and if they change as a result from the capital raise.

On a side note, MicroAlgo's current liabilities have increased over the last five years to 16% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 1.9%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

In Conclusion...

To conclude, we've found that MicroAlgo is reinvesting in the business, but returns have been falling. And investors may be expecting the fundamentals to get a lot worse because the stock has crashed 100% over the last three years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

One more thing: We've identified 4 warning signs with MicroAlgo (at least 3 which shouldn't be ignored) , and understanding these would certainly be useful.

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

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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.