Be Wary Of Values Cultural Investment (HKG:1740) And Its Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Values Cultural Investment (HKG:1740) 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)?

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 Values Cultural Investment is:

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

0.036 = CN¥16m ÷ (CN¥489m - CN¥34m) (Based on the trailing twelve months to December 2020).

So, Values Cultural Investment has an ROCE of 3.6%. Ultimately, that's a low return and it under-performs the Entertainment industry average of 15%.

See our latest analysis for Values Cultural Investment

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're interested in investigating Values Cultural Investment's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Values Cultural Investment's ROCE Trending?

On the surface, the trend of ROCE at Values Cultural Investment doesn't inspire confidence. Around four years ago the returns on capital were 19%, but since then they've fallen to 3.6%. 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.

On a related note, Values Cultural Investment has decreased its current liabilities to 7.0% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Values Cultural Investment's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Values Cultural Investment have fallen, meanwhile the business is employing more capital than it was four years ago. Investors haven't taken kindly to these developments, since the stock has declined 34% from where it was year ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you want to know some of the risks facing Values Cultural Investment we've found 5 warning signs (1 is a bit concerning!) that you should be aware of before investing here.

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. 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.
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