Ruicheng (China) Media Group (HKG:1640) Knows How to Allocate Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, the ROCE of Ruicheng (China) Media Group (HKG:1640) looks attractive right now, so lets see what the trend of returns can tell us.

Return On Capital Employed (ROCE): What is it?

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 Ruicheng (China) Media Group is:

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

0.29 = CN¥64m ÷ (CN¥466m - CN¥243m) (Based on the trailing twelve months to June 2020).

Thus, Ruicheng (China) Media Group has an ROCE of 29%. In absolute terms that's a great return and it's even better than the Media industry average of 10%.

Check out our latest analysis for Ruicheng (China) Media Group

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. 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.

What Does the ROCE Trend For Ruicheng (China) Media Group Tell Us?

Ruicheng (China) Media Group deserves to be commended in regards to it's returns. Over the past three years, ROCE has remained relatively flat at around 29% and the business has deployed 79% more capital into its operations. Now considering ROCE is an attractive 29%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

Another thing to note, Ruicheng (China) Media Group has a high ratio of current liabilities to total assets of 52%. 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.

In Conclusion...

In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. What's surprising though is that the stock has collapsed 79% over the last year, so there might be other areas of the business hurting its prospects. That's why it's worth looking further into this stock because while these fundamentals look good, there could be other issues with the business.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Ruicheng (China) Media Group (of which 2 are a bit unpleasant!) that you should know about.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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