Returns On Capital At 360 Ludashi Holdings (HKG:3601) Paint An Interesting Picture

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, while the ROCE is currently high for 360 Ludashi Holdings (HKG:3601), we aren't jumping out of our chairs because returns are decreasing.

Return On Capital Employed (ROCE): What is it?

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)

0.23 = CN¥107m ÷ (CN¥531m - CN¥64m) (Based on the trailing twelve months to June 2020).

Therefore, 360 Ludashi Holdings has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Interactive Media and Services industry average of 12%.

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, revenue and cash flow of 360 Ludashi Holdings, check out these free graphs here.

What Does the ROCE Trend For 360 Ludashi Holdings Tell Us?

In terms of 360 Ludashi Holdings' historical ROCE movements, the trend isn't fantastic. Historically returns on capital were even higher at 44%, but they have dropped over the last three years. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line On 360 Ludashi Holdings' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that 360 Ludashi Holdings is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 17% over the last year, it would appear that investors are upbeat about the future. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

One more thing: We've identified 3 warning signs with 360 Ludashi Holdings (at least 1 which doesn't sit too well with us) , and understanding these would certainly be useful.

360 Ludashi Holdings is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

When trading 360 Ludashi Holdings or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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