FingerTango (HKG:6860) Might Be Having Difficulty Using Its Capital Effectively

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. 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 FingerTango (HKG:6860), 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 FingerTango, this is the formula:

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

0.072 = CN¥104m ÷ (CN¥1.6b - CN¥210m) (Based on the trailing twelve months to December 2020).

Thus, FingerTango has an ROCE of 7.2%. In absolute terms, that's a low return and it also under-performs the Entertainment industry average of 15%.

Check out 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.

How Are Returns Trending?

On the surface, the trend of ROCE at FingerTango doesn't inspire confidence. To be more specific, ROCE has fallen from 22% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. 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 side note, FingerTango has done well to pay down 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.

In Conclusion...

From the above analysis, we find it rather worrisome that returns on capital and sales for FingerTango have fallen, meanwhile the business is employing more capital than it was five years ago. We expect this has contributed to the stock plummeting 93% during the last three years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One final note, you should learn about the 4 warning signs we've spotted with FingerTango (including 2 which make us uncomfortable) .

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. 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.
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