China Literature's (HKG:772) Returns On Capital Are Heading Higher

Simply Wall St · 10/18 23:13

There are a few key trends to look for if we want to identify the next 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in China Literature's (HKG:772) returns on capital, so let's have a look.

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

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. The formula for this calculation on China Literature is:

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

0.039 = CN¥760m ÷ (CN¥24b - CN¥4.9b) (Based on the trailing twelve months to June 2024).

Therefore, China Literature has an ROCE of 3.9%. Ultimately, that's a low return and it under-performs the Media industry average of 8.3%.

See our latest analysis for China Literature

roce
SEHK:772 Return on Capital Employed October 18th 2024

In the above chart we have measured China Literature's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for China Literature .

So How Is China Literature's ROCE Trending?

While the ROCE isn't as high as some other companies out there, it's great to see it's on the up. The figures show that over the last five years, ROCE has grown 86% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

The Bottom Line On China Literature's ROCE

To sum it up, China Literature is collecting higher returns from the same amount of capital, and that's impressive. And since the stock has fallen 11% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

China Literature does have some risks though, and we've spotted 1 warning sign for China Literature that you might be interested in.

While China Literature 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.