Shareholders Would Enjoy A Repeat Of Huanxi Media Group's (HKG:1003) Recent Growth In Returns

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Speaking of which, we noticed some great changes in Huanxi Media Group's (HKG:1003) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Huanxi Media Group is:

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

0.31 = HK$458m ÷ (HK$2.2b - HK$777m) (Based on the trailing twelve months to December 2023).

Therefore, Huanxi Media Group has an ROCE of 31%. That's a fantastic return and not only that, it outpaces the average of 6.6% earned by companies in a similar industry.

Check out 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'd like to look at how Huanxi Media Group has performed in the past in other metrics, you can view this free graph of Huanxi Media Group's past earnings, revenue and cash flow.

The Trend Of ROCE

Huanxi Media Group has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 31% on its capital. Not only that, but the company is utilizing 121% 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.

On a related note, the company's ratio of current liabilities to total assets has decreased to 35%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Huanxi Media Group has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Bottom Line On Huanxi Media Group's ROCE

In summary, it's great to see that Huanxi Media Group has managed to break into profitability and is continuing to reinvest in its business. Astute investors may have an opportunity here because the stock has declined 67% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

One more thing, we've spotted 1 warning sign facing Huanxi Media Group that you might find interesting.

Huanxi Media Group is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.