The Returns On Capital At Asiaray Media Group (HKG:1993) Don't Inspire Confidence

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Asiaray Media Group (HKG:1993) 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. Analysts use this formula to calculate it for Asiaray Media Group:

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

0.02 = HK$71m ÷ (HK$5.3b - HK$1.7b) (Based on the trailing twelve months to December 2020).

So, Asiaray Media Group has an ROCE of 2.0%. Ultimately, that's a low return and it under-performs the Media industry average of 6.9%.

Check out our latest analysis for Asiaray Media Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Asiaray Media Group's ROCE against it's prior returns. If you'd like to look at how Asiaray Media Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

Unfortunately, the trend isn't great with ROCE falling from 4.3% five years ago, while capital employed has grown 400%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Asiaray Media Group's earnings and if they change as a result from the capital raise.

On a side note, Asiaray Media Group has done well to pay down its current liabilities to 33% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

From the above analysis, we find it rather worrisome that returns on capital and sales for Asiaray Media Group have fallen, meanwhile the business is employing more capital than it was five years ago. Investors haven't taken kindly to these developments, since the stock has declined 27% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Asiaray Media Group does have some risks, we noticed 3 warning signs (and 2 which shouldn't be ignored) we think you should know about.

While Asiaray Media Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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