Here's What's Concerning About Gala Technology Holding's (HKG:2458) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Gala Technology Holding (HKG:2458), it didn't seem to tick all of these boxes.

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Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Gala Technology Holding:

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

0.17 = CN¥74m ÷ (CN¥632m - CN¥193m) (Based on the trailing twelve months to December 2024).

Therefore, Gala Technology Holding has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 11% generated by the Entertainment industry.

See our latest analysis for Gala Technology Holding

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

What Can We Tell From Gala Technology Holding's ROCE Trend?

In terms of Gala Technology Holding's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 17% from 35% 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Gala Technology Holding has done well to pay down its current liabilities to 31% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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 Gala Technology Holding. And the stock has followed suit returning a meaningful 7.9% to shareholders over the last year. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you want to continue researching Gala Technology Holding, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Gala Technology Holding isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.