Capital Allocation Trends At Ruicheng (China) Media Group (HKG:1640) Aren't Ideal

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Ruicheng (China) Media Group (HKG:1640), it didn't seem to tick all of these boxes.

Understanding 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. To calculate this metric for Ruicheng (China) Media Group, this is the formula:

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

0.047 = CN¥12m ÷ (CN¥454m - CN¥201m) (Based on the trailing twelve months to June 2021).

Thus, Ruicheng (China) Media Group has an ROCE of 4.7%. Ultimately, that's a low return and it under-performs the Media industry average of 9.4%.

View our latest analysis for Ruicheng (China) Media Group

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

So How Is Ruicheng (China) Media Group's ROCE Trending?

When we looked at the ROCE trend at Ruicheng (China) Media Group, we didn't gain much confidence. To be more specific, ROCE has fallen from 27% over the last four years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

Another thing to note, Ruicheng (China) Media Group has a high ratio of current liabilities to total assets of 44%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

We're a bit apprehensive about Ruicheng (China) Media Group because despite more capital being deployed in the business, returns on that capital and sales have both fallen. But investors must be expecting an improvement of sorts because over the last yearthe stock has delivered a respectable 30% return. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One more thing: We've identified 5 warning signs with Ruicheng (China) Media Group (at least 2 which shouldn't be ignored) , and understanding these would certainly be useful.

While Ruicheng (China) Media Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.