Returns On Capital At New Media Lab (HKG:1284) Paint A Concerning Picture

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Although, when we looked at New Media Lab (HKG:1284), it didn't seem to tick all of these boxes.

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 New Media Lab, this is the formula:

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

0.08 = HK$20m ÷ (HK$288m - HK$41m) (Based on the trailing twelve months to June 2024).

Thus, New Media Lab has an ROCE of 8.0%. Even though it's in line with the industry average of 8.3%, it's still a low return by itself.

View our latest analysis for New Media Lab

Historical performance is a great place to start when researching a stock so above you can see the gauge for New Media Lab's ROCE against it's prior returns. If you're interested in investigating New Media Lab's past further, check out this free graph covering New Media Lab's past earnings, revenue and cash flow.

So How Is New Media Lab's ROCE Trending?

On the surface, the trend of ROCE at New Media Lab doesn't inspire confidence. Around three years ago the returns on capital were 50%, but since then they've fallen to 8.0%. However it looks like New Media Lab might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, New Media Lab has decreased its current liabilities to 14% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On New Media Lab's ROCE

Bringing it all together, while we're somewhat encouraged by New Media Lab's reinvestment in its own business, we're aware that returns are shrinking. And investors may be recognizing these trends since the stock has only returned a total of 0.1% to shareholders over the last year. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you want to know some of the risks facing New Media Lab we've found 4 warning signs (1 can't be ignored!) that you should be aware of before investing here.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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.