FriendTimes (HKG:6820) Will Be Hoping To Turn Its Returns On Capital Around

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Although, when we looked at FriendTimes (HKG:6820), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for FriendTimes, this is the formula:

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

0.043 = CN¥57m ÷ (CN¥1.4b - CN¥124m) (Based on the trailing twelve months to June 2023).

Thus, FriendTimes has an ROCE of 4.3%. Ultimately, that's a low return and it under-performs the Entertainment industry average of 6.8%.

Check out our latest analysis for FriendTimes

In the above chart we have measured FriendTimes' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for FriendTimes .

How Are Returns Trending?

On the surface, the trend of ROCE at FriendTimes doesn't inspire confidence. Over the last five years, returns on capital have decreased to 4.3% from 53% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a related note, FriendTimes has decreased its current liabilities to 8.6% of total assets. So we could link some of this to the decrease in ROCE. 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 On FriendTimes' ROCE

In summary, we're somewhat concerned by FriendTimes' diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 59% from where it was three years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you want to continue researching FriendTimes, you might be interested to know about the 3 warning signs that our analysis has discovered.

While FriendTimes 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.