Hypebeast (HKG:150) Will Be Hoping To Turn Its Returns On Capital Around

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing 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.

Understanding 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. The formula for this calculation on Hypebeast is:

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

0.11 = HK$56m ÷ (HK$642m - HK$133m) (Based on the trailing twelve months to March 2023).

Thus, Hypebeast has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 4.4% generated by the Interactive Media and Services industry.

View 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 The Trend Of ROCE Can Tell Us

We weren't thrilled with the trend because Hypebeast's ROCE has reduced by 71% over the last five years, while the business employed 260% 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. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Hypebeast's earnings and if they change as a result from the capital raise.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Hypebeast's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 54% in the last five years. Therefore based on the analysis done in this article, we don't think Hypebeast has the makings of a multi-bagger.

If you'd like to know more about Hypebeast, we've spotted 2 warning signs, and 1 of them is significant.

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.