Returns On Capital At 361 Degrees International (HKG:1361) Have Hit The Brakes

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think 361 Degrees International (HKG:1361) 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 that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on 361 Degrees International is:

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

0.12 = CN¥1.1b ÷ (CN¥12b - CN¥3.0b) (Based on the trailing twelve months to June 2022).

Thus, 361 Degrees International has an ROCE of 12%. By itself that's a normal return on capital and it's in line with the industry's average returns of 12%.

See our latest analysis for 361 Degrees International

Above you can see how the current ROCE for 361 Degrees International compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is 361 Degrees International's ROCE Trending?

There hasn't been much to report for 361 Degrees International's returns and its level of capital employed because both metrics have been steady for the past five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect 361 Degrees International to be a multi-bagger going forward. With fewer investment opportunities, it makes sense that 361 Degrees International has been paying out a decent 38% of its earnings to shareholders. Given the business isn't reinvesting in itself, it makes sense to distribute a portion of earnings among shareholders.

What We Can Learn From 361 Degrees International's ROCE

In a nutshell, 361 Degrees International has been trudging along with the same returns from the same amount of capital over the last five years. Since the stock has gained an impressive 51% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

361 Degrees International could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

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.