Investors Will Want Orange Sky Golden Harvest Entertainment (Holdings)'s (HKG:1132) Growth In ROCE To Persist

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 on that note, Orange Sky Golden Harvest Entertainment (Holdings) (HKG:1132) looks quite promising in regards to its trends of return on capital.

What Is 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. Analysts use this formula to calculate it for Orange Sky Golden Harvest Entertainment (Holdings):

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

0.013 = HK$35m ÷ (HK$3.9b - HK$1.2b) (Based on the trailing twelve months to June 2022).

Therefore, Orange Sky Golden Harvest Entertainment (Holdings) has an ROCE of 1.3%. In absolute terms, that's a low return and it also under-performs the Entertainment industry average of 6.8%.

Check out our latest analysis for Orange Sky Golden Harvest Entertainment (Holdings)

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 Orange Sky Golden Harvest Entertainment (Holdings)'s past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Orange Sky Golden Harvest Entertainment (Holdings)'s ROCE Trending?

We're delighted to see that Orange Sky Golden Harvest Entertainment (Holdings) is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 1.3% on its capital. In addition to that, Orange Sky Golden Harvest Entertainment (Holdings) is employing 84% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

One more thing to note, Orange Sky Golden Harvest Entertainment (Holdings) has decreased current liabilities to 30% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

The Bottom Line On Orange Sky Golden Harvest Entertainment (Holdings)'s ROCE

Overall, Orange Sky Golden Harvest Entertainment (Holdings) gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And since the stock has dived 88% over the last five years, there may be other factors affecting the company's prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

Orange Sky Golden Harvest Entertainment (Holdings) does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

While Orange Sky Golden Harvest Entertainment (Holdings) 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.