Returns On Capital Are Showing Encouraging Signs At Huayi Brothers Media (SZSE:300027)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Huayi Brothers Media (SZSE:300027) looks quite promising in regards to its trends of return on capital.

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. To calculate this metric for Huayi Brothers Media, this is the formula:

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

0.074 = CN¥117m ÷ (CN¥3.7b - CN¥2.1b) (Based on the trailing twelve months to September 2024).

Therefore, Huayi Brothers Media has an ROCE of 7.4%. In absolute terms, that's a low return, but it's much better than the Entertainment industry average of 5.3%.

View our latest analysis for Huayi Brothers Media

Above you can see how the current ROCE for Huayi Brothers Media 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 analyst report for Huayi Brothers Media .

So How Is Huayi Brothers Media's ROCE Trending?

It's great to see that Huayi Brothers Media has started to generate some pre-tax earnings from prior investments. While the business is profitable now, it used to be incurring losses on invested capital five years ago. Additionally, the business is utilizing 85% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 57% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.

In Conclusion...

In a nutshell, we're pleased to see that Huayi Brothers Media has been able to generate higher returns from less capital. Astute investors may have an opportunity here because the stock has declined 27% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

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

While Huayi Brothers Media 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.

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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.