Shareholders Would Enjoy A Repeat Of Zengame Technology Holding's (HKG:2660) Recent Growth In Returns

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Zengame Technology Holding's (HKG:2660) returns on capital, so let's have a look.

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 Zengame Technology Holding:

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

0.40 = CN¥712m ÷ (CN¥2.1b - CN¥263m) (Based on the trailing twelve months to December 2022).

Thus, Zengame Technology Holding has an ROCE of 40%. That's a fantastic return and not only that, it outpaces the average of 3.2% earned by companies in a similar industry.

See our latest analysis for Zengame Technology Holding

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

So How Is Zengame Technology Holding's ROCE Trending?

Investors would be pleased with what's happening at Zengame Technology Holding. Over the last five years, returns on capital employed have risen substantially to 40%. The amount of capital employed has increased too, by 663%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

One more thing to note, Zengame Technology Holding has decreased current liabilities to 13% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

In Conclusion...

All in all, it's terrific to see that Zengame Technology Holding is reaping the rewards from prior investments and is growing its capital base. And with the stock having performed exceptionally well over the last three years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One more thing, we've spotted 2 warning signs facing Zengame Technology Holding that you might find interesting.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.