Returns On Capital Are Showing Encouraging Signs At Maoyan Entertainment (HKG:1896)

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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. So on that note, Maoyan Entertainment (HKG:1896) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for Maoyan Entertainment, this is the formula:

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

0.066 = CN¥582m ÷ (CN¥13b - CN¥3.8b) (Based on the trailing twelve months to June 2023).

Therefore, Maoyan Entertainment has an ROCE of 6.6%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.6%.

See our latest analysis for Maoyan Entertainment

Above you can see how the current ROCE for Maoyan Entertainment compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Maoyan Entertainment for free.

What The Trend Of ROCE Can Tell Us

We're delighted to see that Maoyan Entertainment is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 6.6% on its capital. In addition to that, Maoyan Entertainment is employing 57% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

The Key Takeaway

In summary, it's great to see that Maoyan Entertainment has managed to break into profitability and is continuing to reinvest in its business. Astute investors may have an opportunity here because the stock has declined 36% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation for 1896 on our platform that is definitely worth checking out.

While Maoyan Entertainment 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.