There Are Reasons To Feel Uneasy About Tian Ge Interactive Holdings' (HKG:1980) Returns On Capital

By
Simply Wall St
Published
June 14, 2021
SEHK:1980
Source: Shutterstock

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Tian Ge Interactive Holdings (HKG:1980), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Tian Ge Interactive Holdings, this is the formula:

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

0.016 = CN¥48m ÷ (CN¥3.5b - CN¥592m) (Based on the trailing twelve months to December 2020).

So, Tian Ge Interactive Holdings has an ROCE of 1.6%. Ultimately, that's a low return and it under-performs the Interactive Media and Services industry average of 9.4%.

Check out our latest analysis for Tian Ge Interactive Holdings

roce
SEHK:1980 Return on Capital Employed June 15th 2021

Above you can see how the current ROCE for Tian Ge Interactive Holdings 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 Tian Ge Interactive Holdings here for free.

How Are Returns Trending?

On the surface, the trend of ROCE at Tian Ge Interactive Holdings doesn't inspire confidence. Over the last five years, returns on capital have decreased to 1.6% from 6.6% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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.

The Bottom Line

In summary, we're somewhat concerned by Tian Ge Interactive Holdings' diminishing returns on increasing amounts of capital. Unsurprisingly then, the stock has dived 74% over the last five years, so investors are recognizing these changes and don't like the company's prospects. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing: We've identified 2 warning signs with Tian Ge Interactive Holdings (at least 1 which is concerning) , and understanding these would certainly be useful.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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