Investors Will Want SEEC Media Group's (HKG:205) Growth In ROCE To Persist

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at SEEC Media Group (HKG:205) and its trend of ROCE, we really liked what we saw.

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 SEEC Media Group, this is the formula:

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

0.025 = HK$7.3m ÷ (HK$543m - HK$254m) (Based on the trailing twelve months to June 2021).

Thus, SEEC Media Group has an ROCE of 2.5%. Ultimately, that's a low return and it under-performs the Media industry average of 7.6%.

Check out our latest analysis for SEEC Media Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for SEEC Media Group's ROCE against it's prior returns. If you're interested in investigating SEEC Media Group's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For SEEC Media Group Tell Us?

Like most people, we're pleased that SEEC Media Group is now generating some pretax earnings. The company was generating losses five years ago, but now it's turned around, earning 2.5% which is no doubt a relief for some early shareholders. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 69%. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 47% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

In Conclusion...

From what we've seen above, SEEC Media Group has managed to increase it's returns on capital all the while reducing it's capital base. Astute investors may have an opportunity here because the stock has declined 66% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

SEEC Media Group does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is significant...

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.

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.

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