Be Wary Of CMGE Technology Group (HKG:302) And Its Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating CMGE Technology Group (HKG:302), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for CMGE Technology Group, this is the formula:

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

0.0013 = CN¥7.4m ÷ (CN¥7.1b - CN¥1.3b) (Based on the trailing twelve months to December 2023).

Therefore, CMGE Technology Group has an ROCE of 0.1%. In absolute terms, that's a low return and it also under-performs the Entertainment industry average of 6.6%.

Check out our latest analysis for CMGE Technology Group

In the above chart we have measured CMGE Technology Group's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for CMGE Technology Group .

What Can We Tell From CMGE Technology Group's ROCE Trend?

On the surface, the trend of ROCE at CMGE Technology Group doesn't inspire confidence. To be more specific, ROCE has fallen from 10% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line On CMGE Technology Group's ROCE

To conclude, we've found that CMGE Technology Group is reinvesting in the business, but returns have been falling. Moreover, since the stock has crumbled 73% over the last three years, it appears investors are expecting the worst. Therefore based on the analysis done in this article, we don't think CMGE Technology Group has the makings of a multi-bagger.

If you're still interested in CMGE Technology Group it's worth checking out our FREE intrinsic value approximation for 302 to see if it's trading at an attractive price in other respects.

While CMGE Technology 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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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.

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