Be Wary Of Strawbear Entertainment Group (HKG:2125) And Its Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Strawbear Entertainment Group (HKG:2125), it didn't seem to tick all of these boxes.

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Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Strawbear Entertainment Group, this is the formula:

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

0.023 = CN¥41m ÷ (CN¥2.7b - CN¥902m) (Based on the trailing twelve months to December 2024).

So, Strawbear Entertainment Group has an ROCE of 2.3%. Ultimately, that's a low return and it under-performs the Entertainment industry average of 12%.

See our latest analysis for Strawbear Entertainment Group

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

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Strawbear Entertainment Group, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 2.3% from 11% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Strawbear Entertainment Group has decreased its current liabilities to 34% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Strawbear Entertainment Group. Despite these promising trends, the stock has collapsed 88% over the last three years, so there could be other factors hurting the company's prospects. Regardless, reinvestment can pay off in the long run, so we think astute investors may want to look further into this stock.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Strawbear Entertainment Group (of which 1 is concerning!) that you should know about.

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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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.