China Literature (HKG:772) Is Experiencing Growth In Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at China Literature (HKG:772) so let's look a bit deeper.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for China Literature:

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

0.056 = CN¥959m ÷ (CN¥21b - CN¥4.2b) (Based on the trailing twelve months to December 2020).

Thus, China Literature has an ROCE of 5.6%. On its own, that's a low figure but it's around the 6.9% average generated by the Media industry.

Check out our latest analysis for China Literature

Above you can see how the current ROCE for China Literature 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.

So How Is China Literature's ROCE Trending?

China Literature has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 5.6% on its capital. And unsurprisingly, like most companies trying to break into the black, China Literature is utilizing 254% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

The Bottom Line On China Literature's ROCE

To the delight of most shareholders, China Literature has now broken into profitability. Since the stock has returned a solid 34% to shareholders over the last three years, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

On a final note, we've found 2 warning signs for China Literature that we think you should be aware of.

While China Literature 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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