Returns On Capital At Medialink Group (HKG:2230) Paint An Interesting Picture

To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Medialink Group (HKG:2230), 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. Analysts use this formula to calculate it for Medialink Group:

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

0.11 = HK$54m ÷ (HK$731m - HK$226m) (Based on the trailing twelve months to September 2020).

So, Medialink Group has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 13% generated by the Interactive Media and Services industry.

View our latest analysis for Medialink Group

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Medialink Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

When we looked at the ROCE trend at Medialink Group, we didn't gain much confidence. Over the last four years, returns on capital have decreased to 11% from 41% four years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Medialink Group has done well to pay down its current liabilities to 31% 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line

In summary, we're somewhat concerned by Medialink Group's diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 23% from where it was year ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know more about Medialink Group, we've spotted 4 warning signs, and 2 of them are a bit concerning.

While Medialink 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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