360 Ludashi Holdings (HKG:3601) Will Be Hoping To Turn Its Returns On Capital Around

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Having said that, from a first glance at 360 Ludashi Holdings (HKG:3601) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for 360 Ludashi Holdings:

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

0.13 = CN¥76m ÷ (CN¥610m - CN¥43m) (Based on the trailing twelve months to June 2022).

So, 360 Ludashi Holdings has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 8.8% generated by the Interactive Media and Services industry.

Check out our latest analysis for 360 Ludashi Holdings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating 360 Ludashi Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From 360 Ludashi Holdings' ROCE Trend?

When we looked at the ROCE trend at 360 Ludashi Holdings, we didn't gain much confidence. Around five years ago the returns on capital were 44%, but since then they've fallen to 13%. However it looks like 360 Ludashi Holdings might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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 360 Ludashi Holdings' ROCE

Bringing it all together, while we're somewhat encouraged by 360 Ludashi Holdings' reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 68% in the last three years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One more thing: We've identified 3 warning signs with 360 Ludashi Holdings (at least 1 which is a bit unpleasant) , and understanding these would certainly be useful.

While 360 Ludashi Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.