Returns On Capital At China Partytime Culture Holdings (HKG:1532) Paint An Interesting Picture

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Having said that, from a first glance at China Partytime Culture Holdings (HKG:1532) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for China Partytime Culture Holdings:

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

0.0072 = CN¥2.7m ÷ (CN¥527m - CN¥152m) (Based on the trailing twelve months to June 2020).

So, China Partytime Culture Holdings has an ROCE of 0.7%. Ultimately, that's a low return and it under-performs the Luxury industry average of 9.2%.

View our latest analysis for China Partytime Culture Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for China Partytime Culture Holdings' ROCE against it's prior returns. If you're interested in investigating China Partytime Culture Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at China Partytime Culture Holdings doesn't inspire confidence. Over the last five years, returns on capital have decreased to 0.7% from 39% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

Our Take On China Partytime Culture Holdings' ROCE

In summary, we're somewhat concerned by China Partytime Culture Holdings' diminishing returns on increasing amounts of capital. We expect this has contributed to the stock plummeting 76% during the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for China Partytime Culture Holdings (of which 1 is a bit concerning!) that you should know about.

While China Partytime Culture Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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