Investors Could Be Concerned With Qingci Games' (HKG:6633) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Qingci Games (HKG:6633) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Qingci Games is:

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

0.083 = CN¥155m ÷ (CN¥2.0b - CN¥154m) (Based on the trailing twelve months to June 2023).

Therefore, Qingci Games has an ROCE of 8.3%. In absolute terms, that's a low return, but it's much better than the Entertainment industry average of 6.5%.

View our latest analysis for Qingci Games

Above you can see how the current ROCE for Qingci Games compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Qingci Games here for free.

What Does the ROCE Trend For Qingci Games Tell Us?

When we looked at the ROCE trend at Qingci Games, we didn't gain much confidence. To be more specific, ROCE has fallen from 15% over the last four 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.

On a side note, Qingci Games has done well to pay down its current liabilities to 7.6% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Qingci Games. These growth trends haven't led to growth returns though, since the stock has fallen 15% over the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Qingci Games does have some risks though, and we've spotted 1 warning sign for Qingci Games that you might be interested in.

While Qingci Games 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.