Is CMGE Technology Group (HKG:302) Likely To Turn Things Around?

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think CMGE Technology Group (HKG:302) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is 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. 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)

0.053 = CN¥223m ÷ (CN¥5.6b - CN¥1.4b) (Based on the trailing twelve months to June 2020).

So, CMGE Technology Group has an ROCE of 5.3%. Ultimately, that's a low return and it under-performs the Entertainment industry average of 15%.

View our latest analysis for CMGE Technology Group

Above you can see how the current ROCE for CMGE Technology Group 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 CMGE Technology Group here for free.

So How Is CMGE Technology Group's ROCE Trending?

On the surface, the trend of ROCE at CMGE Technology Group doesn't inspire confidence. Around three years ago the returns on capital were 10%, but since then they've fallen to 5.3%. 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. If these investments prove successful, this can bode very well for long term stock performance.

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 CMGE Technology Group. These growth trends haven't led to growth returns though, since the stock has fallen 10% over the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you'd like to know about the risks facing CMGE Technology Group, we've discovered 3 warning signs that you should be aware of.

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. 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.
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