Returns On Capital Are A Standout For Huanxi Media Group (HKG:1003)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. So when we looked at the ROCE trend of Huanxi Media Group (HKG:1003) we really liked what we saw.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Huanxi Media Group, this is the formula:

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

0.36 = HK$599m ÷ (HK$2.4b - HK$675m) (Based on the trailing twelve months to June 2023).

Thus, Huanxi Media Group has an ROCE of 36%. In absolute terms that's a great return and it's even better than the Entertainment industry average of 6.5%.

View our latest analysis for Huanxi Media Group

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Huanxi Media Group's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Huanxi Media Group's ROCE Trend?

Huanxi Media Group has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 36% which is a sight for sore eyes. Not only that, but the company is utilizing 128% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

The Key Takeaway

Long story short, we're delighted to see that Huanxi Media Group's reinvestment activities have paid off and the company is now profitable. And since the stock has fallen 64% 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.

One more thing to note, we've identified 1 warning sign with Huanxi Media Group and understanding it should be part of your investment process.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.