If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. However, after investigating Minth Group (HKG:425), we don't think it's current trends fit the mold of a multi-bagger.
What Is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Minth Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.05 = CN¥998m ÷ (CN¥30b - CN¥10b) (Based on the trailing twelve months to June 2022).
Thus, Minth Group has an ROCE of 5.0%. On its own, that's a low figure but it's around the 4.2% average generated by the Auto Components industry.
Check out our latest analysis for Minth Group
SEHK:425 Return on Capital Employed January 5th 2023
Above you can see how the current ROCE for Minth Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Minth Group.
What Can We Tell From Minth Group's ROCE Trend?
When we looked at the ROCE trend at Minth Group, we didn't gain much confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 5.0%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
The Bottom Line On Minth Group's ROCE
In summary, Minth Group is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 48% in the last five years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
If you want to continue researching Minth Group, you might be interested to know about the 1 warning sign that our analysis has discovered.
While Minth Group 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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