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Here's What's Concerning About Miracll ChemicalsLtd's (SZSE:300848) Returns On Capital

Simply Wall St ·  {{timeTz}}

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 briefly looking over the numbers, we don't think Miracll ChemicalsLtd (SZSE:300848) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Miracll ChemicalsLtd:

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

0.096 = CN¥97m ÷ (CN¥1.8b - CN¥737m) (Based on the trailing twelve months to March 2022).

Therefore, Miracll ChemicalsLtd has an ROCE of 9.6%. Even though it's in line with the industry average of 10.0%, it's still a low return by itself.

See our latest analysis for Miracll ChemicalsLtd

roceSZSE:300848 Return on Capital Employed July 29th 2022

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'd like to look at how Miracll ChemicalsLtd has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Miracll ChemicalsLtd Tell Us?

We weren't thrilled with the trend because Miracll ChemicalsLtd's ROCE has reduced by 61% over the last five years, while the business employed 626% more capital. Usually this isn't ideal, but given Miracll ChemicalsLtd conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Miracll ChemicalsLtd might not have received a full period of earnings contribution from it.

Another thing to note, Miracll ChemicalsLtd has a high ratio of current liabilities to total assets of 42%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Miracll ChemicalsLtd. Furthermore the stock has climbed 26% over the last year, it would appear that investors are upbeat about the future. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

On a final note, we found 4 warning signs for Miracll ChemicalsLtd (1 is concerning) you should be aware of.

While Miracll ChemicalsLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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

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