Investors Could Be Concerned With Ruicheng (China) Media Group's (HKG:1640) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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 Ruicheng (China) Media Group (HKG:1640), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Ruicheng (China) Media Group is:

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

0.011 = CN¥2.9m ÷ (CN¥407m - CN¥140m) (Based on the trailing twelve months to December 2020).

Thus, Ruicheng (China) Media Group has an ROCE of 1.1%. In absolute terms, that's a low return and it also under-performs the Media industry average of 6.9%.

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're interested in investigating Ruicheng (China) Media Group's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Ruicheng (China) Media Group's ROCE Trend?

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 16% over the last four years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

Our Take On Ruicheng (China) Media Group's ROCE

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. Yet despite these concerning fundamentals, the stock has performed strongly with a 88% return over the last year, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you'd like to know more about Ruicheng (China) Media Group, we've spotted 6 warning signs, and 2 of them are concerning.

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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