The Returns On Capital At FriendTimes (HKG:6820) Don't Inspire Confidence

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Although, when we looked at FriendTimes (HKG:6820), it didn't seem to tick all of these boxes.

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. The formula for this calculation on FriendTimes is:

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

0.043 = CN¥60m ÷ (CN¥1.5b - CN¥80m) (Based on the trailing twelve months to June 2022).

So, FriendTimes has an ROCE of 4.3%. In absolute terms, that's a low return and it also under-performs the Entertainment industry average of 7.3%.

See 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, you can check out the forecasts from the analysts covering FriendTimes here for free.

How Are Returns Trending?

In terms of FriendTimes' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 38% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, FriendTimes has done well to pay down its current liabilities to 5.5% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From FriendTimes' ROCE

We're a bit apprehensive about FriendTimes because despite more capital being deployed in the business, returns on that capital and sales have both fallen. In spite of that, the stock has delivered a 2.0% return to shareholders who held over the last three years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

On a final note, we found 2 warning signs for FriendTimes (1 is a bit unpleasant) you should be aware of.

While FriendTimes 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.