Joy Spreader Group (HKG:6988) Could Be Struggling To Allocate Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Joy Spreader Group (HKG:6988) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

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 Joy Spreader Group is:

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

0.065 = HK$191m ÷ (HK$3.0b - HK$57m) (Based on the trailing twelve months to June 2022).

Therefore, Joy Spreader Group has an ROCE of 6.5%. In absolute terms, that's a low return, but it's much better than the Media industry average of 5.3%.

Check out the opportunities and risks within the HK Media industry.

Above you can see how the current ROCE for Joy Spreader Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Joy Spreader Group's ROCE Trend?

When we looked at the ROCE trend at Joy Spreader Group, we didn't gain much confidence. To be more specific, ROCE has fallen from 60% over the last five 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, Joy Spreader Group has done well to pay down its current liabilities to 1.9% 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.

What We Can Learn From Joy Spreader Group's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Joy Spreader Group. And there could be an opportunity here if other metrics look good too, because the stock has declined 32% in the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One more thing: We've identified 5 warning signs with Joy Spreader Group (at least 2 which are potentially serious) , and understanding these would certainly be useful.

While Joy Spreader Group 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.