CA Cultural Technology Group (HKG:1566) Could Be Struggling To Allocate Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 briefly looking over the numbers, we don't think CA Cultural Technology Group (HKG:1566) 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. To calculate this metric for CA Cultural Technology Group, this is the formula:

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

0.042 = HK$78m ÷ (HK$2.4b - HK$531m) (Based on the trailing twelve months to September 2021).

Therefore, CA Cultural Technology Group has an ROCE of 4.2%. On its own that's a low return, but compared to the average of 3.0% generated by the Hospitality industry, it's much better.

View our latest analysis for CA Cultural Technology Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for CA Cultural Technology Group's ROCE against it's prior returns. If you'd like to look at how CA Cultural Technology Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

When we looked at the ROCE trend at CA Cultural Technology Group, we didn't gain much confidence. To be more specific, ROCE has fallen from 16% over the last five years. 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.

Our Take On CA Cultural Technology Group's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for CA Cultural Technology Group. But since the stock has dived 91% in the last five years, there could be other drivers that are influencing the business' outlook. Regardless, reinvestment can pay off in the long run, so we think astute investors may want to look further into this stock.

If you'd like to know more about CA Cultural Technology Group, we've spotted 6 warning signs, and 1 of them is significant.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.