NetDragon Websoft Holdings (HKG:777) Could Be Struggling To Allocate Capital

When researching a stock for investment, what can tell us that the company is in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. On that note, looking into NetDragon Websoft Holdings (HKG:777), we weren't too upbeat about how things were going.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

What Is Return On Capital Employed (ROCE)?

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 NetDragon Websoft Holdings is:

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

0.026 = CN¥146m ÷ (CN¥10b - CN¥4.5b) (Based on the trailing twelve months to June 2025).

So, NetDragon Websoft Holdings has an ROCE of 2.6%. Ultimately, that's a low return and it under-performs the Entertainment industry average of 8.7%.

See our latest analysis for NetDragon Websoft Holdings

Above you can see how the current ROCE for NetDragon Websoft Holdings 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 analyst report for NetDragon Websoft Holdings .

The Trend Of ROCE

The trend of returns that NetDragon Websoft Holdings is generating are raising some concerns. Unfortunately, returns have declined substantially over the last five years to the 2.6% we see today. In addition to that, NetDragon Websoft Holdings is now employing 27% less capital than it was five years ago. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.

On a side note, NetDragon Websoft Holdings' current liabilities have increased over the last five years to 44% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

The Bottom Line On NetDragon Websoft Holdings' ROCE

In summary, it's unfortunate that NetDragon Websoft Holdings is shrinking its capital base and also generating lower returns. However the stock has delivered a 42% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One more thing, we've spotted 1 warning sign facing NetDragon Websoft Holdings that you might find interesting.

While NetDragon Websoft Holdings 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.