Be Wary Of FingerTango (HKG:6860) And Its Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. However, after briefly looking over the numbers, we don't think FingerTango (HKG:6860) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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. Analysts use this formula to calculate it for FingerTango:

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

0.072 = CN¥103m ÷ (CN¥1.6b - CN¥210m) (Based on the trailing twelve months to December 2020).

Thus, FingerTango has an ROCE of 7.2%. Ultimately, that's a low return and it under-performs the Entertainment industry average of 13%.

See our latest analysis for FingerTango

Historical performance is a great place to start when researching a stock so above you can see the gauge for FingerTango's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of FingerTango, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

In terms of FingerTango's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 7.2% from 22% 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, FingerTango has decreased its current liabilities to 13% of total assets. Since the ratio used to be 90%, that's a significant reduction and it no doubt explains the drop in ROCE. 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.

Our Take On FingerTango's ROCE

We're a bit apprehensive about FingerTango because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors must expect better things on the horizon though because the stock has risen 3.8% in the last year. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

FingerTango does have some risks, we noticed 2 warning signs (and 1 which is a bit concerning) we think you should know about.

While FingerTango 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. 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.
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