Should You Be Impressed By CMGE Technology Group's (HKG:302) Returns on Capital?

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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at CMGE Technology Group (HKG:302) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on CMGE Technology Group is:

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%. In absolute terms, that's a low return and it also under-performs the Entertainment industry average of 14%.

Check out 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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

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 three years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From CMGE Technology Group's ROCE

While returns have fallen for CMGE Technology Group in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has followed suit returning a meaningful 12% to shareholders over the last year. So should these growth trends continue, we'd be optimistic on the stock going forward.

On a final note, we've found 3 warning signs for CMGE Technology Group that we think 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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