China Literature (HKG:772) Is Looking To Continue Growing Its Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in China Literature's (HKG:772) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on China Literature is:

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 5.1% 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?

We're delighted to see that China Literature is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 5.6% which is a sight for sore eyes. Not only that, but the company is utilizing 254% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

In Conclusion...

To the delight of most shareholders, China Literature has now broken into profitability. Considering the stock has delivered 4.5% to its stockholders over the last three years, it may be fair to think that investors aren't fully aware of the promising trends yet. So with that in mind, we think the stock deserves further research.

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

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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