The Returns On Capital At Strawbear Entertainment Group (HKG:2125) Don't Inspire Confidence

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Strawbear Entertainment Group (HKG:2125), we don't think it's current trends fit the mold of a multi-bagger.

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 Strawbear Entertainment Group, this is the formula:

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

0.11 = CN¥195m ÷ (CN¥2.9b - CN¥1.1b) (Based on the trailing twelve months to June 2022).

Thus, Strawbear Entertainment Group has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Entertainment industry average of 7.8% it's much better.

Check out our latest analysis for Strawbear Entertainment Group

Above you can see how the current ROCE for Strawbear Entertainment Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Strawbear Entertainment Group.

So How Is Strawbear Entertainment Group's ROCE Trending?

In terms of Strawbear Entertainment Group's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 21% 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.

On a related note, Strawbear Entertainment Group has decreased its current liabilities to 36% of total assets. So we could link some of this to the decrease in ROCE. 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.

What We Can Learn From Strawbear Entertainment Group's ROCE

In summary, we're somewhat concerned by Strawbear Entertainment Group's diminishing returns on increasing amounts of capital. Unsurprisingly then, the stock has dived 80% over the last year, so investors are recognizing these changes and don't like the company's prospects. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing: We've identified 3 warning signs with Strawbear Entertainment Group (at least 2 which make us uncomfortable) , and understanding these would certainly be useful.

While Strawbear Entertainment 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.