What Can The Trends At China Literature (HKG:772) Tell Us About Their Returns?

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, China Literature (HKG:772) looks quite promising in regards to its trends of return on capital.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its 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)

0.048 = CN¥832m ÷ (CN¥21b - CN¥4.1b) (Based on the trailing twelve months to June 2020).

So, China Literature has an ROCE of 4.8%. Ultimately, that's a low return and it under-performs the Media industry average of 14%.

See 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'd like to see what analysts are forecasting going forward, you should check out our free report for China Literature.

What Does the ROCE Trend For China Literature Tell Us?

We're delighted to see that China Literature is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 4.8% on its capital. And unsurprisingly, like most companies trying to break into the black, China Literature is utilizing 253% more capital than it was five years ago. 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.

The Bottom Line On China Literature's ROCE

In summary, it's great to see that China Literature has managed to break into profitability and is continuing to reinvest in its business. And since the stock has fallen 30% over the last three years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation on our platform that is definitely worth checking out.

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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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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