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

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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 on that note, SEEC Media Group (HKG:205) looks quite promising in regards to its trends of return on capital.

What is 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. Analysts use this formula to calculate it for SEEC Media Group:

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).

Therefore, SEEC Media Group has an ROCE of 2.5%. Ultimately, that's a low return and it under-performs the Media industry average of 9.1%.

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 want to delve into the historical earnings, revenue and cash flow of SEEC Media Group, check out these free graphs here.

The Trend Of ROCE

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. Additionally, the business is utilizing 69% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. 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.

The Key Takeaway

In the end, SEEC Media Group has proven it's capital allocation skills are good with those higher returns from less amount of capital. However the stock is down a substantial 88% in the last five years so there could be other areas of the business hurting its prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

If you want to know some of the risks facing SEEC Media Group we've found 4 warning signs (1 is a bit unpleasant!) that you should be aware of before investing here.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.