Investors Could Be Concerned With Cathay Media and Education Group's (HKG:1981) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. In light of that, when we looked at Cathay Media and Education Group (HKG:1981) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

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 Cathay Media and Education Group is:

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

0.06 = CN¥164m ÷ (CN¥3.7b - CN¥964m) (Based on the trailing twelve months to December 2021).

Thus, Cathay Media and Education Group has an ROCE of 6.0%. In absolute terms, that's a low return and it also under-performs the Entertainment industry average of 7.7%.

See our latest analysis for Cathay Media and Education Group

In the above chart we have measured Cathay Media and Education Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Cathay Media and Education Group.

What Does the ROCE Trend For Cathay Media and Education Group Tell Us?

When we looked at the ROCE trend at Cathay Media and Education Group, we didn't gain much confidence. To be more specific, ROCE has fallen from 17% over the last four years. 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 Key Takeaway

We're a bit apprehensive about Cathay Media and Education Group because despite more capital being deployed in the business, returns on that capital and sales have both fallen. This could explain why the stock has sunk a total of 79% in the last year. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you want to know some of the risks facing Cathay Media and Education Group we've found 4 warning signs (2 make us uncomfortable!) that you should be aware of before investing here.

While Cathay Media and Education 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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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.