Be Wary Of 360 Ludashi Holdings (HKG:3601) And Its 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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. However, after investigating 360 Ludashi Holdings (HKG:3601), we don't think it's current trends fit the mold of a multi-bagger.

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. 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)

0.10 = CN¥65m ÷ (CN¥729m - CN¥96m) (Based on the trailing twelve months to June 2023).

So, 360 Ludashi Holdings has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 5.6% generated by the Interactive Media and Services industry.

See our latest analysis for 360 Ludashi Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for 360 Ludashi Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of 360 Ludashi Holdings.

What The Trend Of ROCE Can Tell Us

In terms of 360 Ludashi Holdings' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 42%, but since then they've fallen to 10%. 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. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On 360 Ludashi Holdings' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for 360 Ludashi Holdings. But since the stock has dived 74% in the last three years, there could be other drivers that are influencing the business' outlook. Therefore, we'd suggest researching the stock further to uncover more about the business.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for 360 Ludashi Holdings (of which 2 are potentially serious!) that you should know about.

While 360 Ludashi Holdings 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.