The Return Trends At Universe Entertainment and Culture Group (HKG:1046) Look Promising

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Universe Entertainment and Culture Group (HKG:1046) so let's look a bit deeper.

What is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Universe Entertainment and Culture Group:

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

0.19 = HK$94m ÷ (HK$1.2b - HK$741m) (Based on the trailing twelve months to December 2021).

Therefore, Universe Entertainment and Culture Group has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Entertainment industry average of 6.0% it's much better.

See our latest analysis for Universe Entertainment and Culture 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 Universe Entertainment and Culture Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Universe Entertainment and Culture Group's ROCE Trending?

It's great to see that Universe Entertainment and Culture Group has started to generate some pre-tax earnings from prior investments. The company was generating losses five years ago, but now it's turned around, earning 19% which is no doubt a relief for some early shareholders. In regards to capital employed, Universe Entertainment and Culture Group is using 49% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. Universe Entertainment and Culture Group could be selling under-performing assets since the ROCE is improving.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 60% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

Our Take On Universe Entertainment and Culture Group's ROCE

In the end, Universe Entertainment and Culture Group has proven it's capital allocation skills are good with those higher returns from less amount of capital. Since the stock has only returned 32% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.

If you'd like to know about the risks facing Universe Entertainment and Culture Group, we've discovered 1 warning sign that you should be aware of.

While Universe Entertainment and Culture Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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.