Capital Allocation Trends At Hypebeast (HKG:150) Aren't Ideal

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Having said that, from a first glance at Hypebeast (HKG:150) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Hypebeast is:

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

0.18 = HK$81m ÷ (HK$701m - HK$251m) (Based on the trailing twelve months to September 2022).

So, Hypebeast has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 4.7% generated by the Interactive Media and Services industry.

See our latest analysis for Hypebeast

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hypebeast's ROCE against it's prior returns. If you'd like to look at how Hypebeast has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Hypebeast Tell Us?

We weren't thrilled with the trend because Hypebeast's ROCE has reduced by 47% over the last five years, while the business employed 309% more capital. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. Hypebeast probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

The Key Takeaway

To conclude, we've found that Hypebeast is reinvesting in the business, but returns have been falling. Moreover, since the stock has crumbled 73% over the last five years, it appears investors are expecting the worst. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Hypebeast does have some risks though, and we've spotted 1 warning sign for Hypebeast that you might be interested in.

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.