Under The Bonnet, Zengame Technology Holding's (HKG:2660) Returns Look Impressive

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. With that in mind, the ROCE of Zengame Technology Holding (HKG:2660) looks great, so lets see what the trend can tell us.

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. 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)

0.33 = CN¥236m ÷ (CN¥810m - CN¥90m) (Based on the trailing twelve months to June 2020).

Thus, Zengame Technology Holding has an ROCE of 33%. In absolute terms that's a great return and it's even better than the Entertainment industry average of 13%.

View our latest analysis for Zengame Technology Holding

Above you can see how the current ROCE for Zengame Technology Holding compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Zengame Technology Holding here for free.

How Are Returns Trending?

The trends we've noticed at Zengame Technology Holding are quite reassuring. The data shows that returns on capital have increased substantially over the last three years to 33%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 250%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 11%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. 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.

What We Can Learn From Zengame Technology Holding's ROCE

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. Since the stock has returned a solid 99% to shareholders over the last year, it's fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Like most companies, Zengame Technology Holding does come with some risks, and we've found 1 warning sign that you should be aware of.

Zengame Technology Holding is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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