We Like These Underlying Return On Capital Trends At Orange Sky Golden Harvest Entertainment (Holdings) (HKG:1132)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Orange Sky Golden Harvest Entertainment (Holdings) (HKG:1132) and its trend of ROCE, we really liked what we saw.

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. To calculate this metric for Orange Sky Golden Harvest Entertainment (Holdings), this is the formula:

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).

So, 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 7.3%.

Our analysis indicates that 1132 is potentially undervalued!

Historical performance is a great place to start when researching a stock so above you can see the gauge for Orange Sky Golden Harvest Entertainment (Holdings)'s ROCE against it's prior returns. 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?

Orange Sky Golden Harvest Entertainment (Holdings) 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 1.3% which is a sight for sore eyes. Not only that, but the company is utilizing 81% more capital than before, but that's to be expected from a company 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.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 30%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Orange Sky Golden Harvest Entertainment (Holdings) has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

Our Take On Orange Sky Golden Harvest Entertainment (Holdings)'s ROCE

To the delight of most shareholders, Orange Sky Golden Harvest Entertainment (Holdings) has now broken into profitability. Although the company may be facing some issues elsewhere since the stock has plunged 86% in the last five years. Still, it's worth doing some further research to see if the trends will continue into the future.

One final note, you should learn about the 2 warning signs we've spotted with Orange Sky Golden Harvest Entertainment (Holdings) (including 1 which can't be ignored) .

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.