Some Investors May Be Worried About 360 Ludashi Holdings' (HKG:3601) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating 360 Ludashi Holdings (HKG:3601), we don't think it's current trends fit the mold of a multi-bagger.

Our free stock report includes 4 warning signs investors should be aware of before investing in 360 Ludashi Holdings. Read for free now.

Return On Capital Employed (ROCE): What Is It?

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. 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)

0.053 = CN¥36m ÷ (CN¥784m - CN¥105m) (Based on the trailing twelve months to December 2024).

Therefore, 360 Ludashi Holdings has an ROCE of 5.3%. Ultimately, that's a low return and it under-performs the Interactive Media and Services industry average of 8.3%.

See 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'd like to look at how 360 Ludashi Holdings has performed in the past in other metrics, you can view this free graph of 360 Ludashi Holdings' past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of 360 Ludashi Holdings' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 5.3% from 27% five years ago. 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 Bottom Line

While returns have fallen for 360 Ludashi Holdings in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These growth trends haven't led to growth returns though, since the stock has fallen 57% over the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

360 Ludashi Holdings does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those is potentially serious...

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.

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

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.