Be Wary Of Migao Group Holdings (HKG:9879) And Its Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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 Migao Group Holdings (HKG:9879), we don't think it's current trends fit the mold of a multi-bagger.

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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. The formula for this calculation on Migao Group Holdings is:

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

0.14 = CN¥434m ÷ (CN¥5.2b - CN¥2.2b) (Based on the trailing twelve months to March 2025).

So, Migao Group Holdings has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 8.5% it's much better.

See our latest analysis for Migao Group Holdings

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 Migao Group Holdings has performed in the past in other metrics, you can view this free graph of Migao Group Holdings' past earnings, revenue and cash flow.

What Does the ROCE Trend For Migao Group Holdings Tell Us?

On the surface, the trend of ROCE at Migao Group Holdings doesn't inspire confidence. Around four years ago the returns on capital were 19%, but since then they've fallen to 14%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Migao Group Holdings has decreased its current liabilities to 41% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that Migao Group Holdings is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 14% to shareholders over the last year. So should these growth trends continue, we'd be optimistic on the stock going forward.

Like most companies, Migao Group Holdings does come with some risks, and we've found 1 warning sign that you should be aware of.

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.