NetDragon Websoft Holdings (HKG:777) 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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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 when we looked at NetDragon Websoft Holdings (HKG:777) and its trend of ROCE, we really liked what we saw.

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. To calculate this metric for NetDragon Websoft Holdings, this is the formula:

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

0.16 = CN¥1.3b ÷ (CN¥10.0b - CN¥2.0b) (Based on the trailing twelve months to December 2020).

Therefore, NetDragon Websoft Holdings has an ROCE of 16%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Entertainment industry average of 15%.

View 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'd like, you can check out the forecasts from the analysts covering NetDragon Websoft Holdings here for free.

So How Is NetDragon Websoft Holdings' ROCE Trending?

NetDragon Websoft Holdings has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 16% on its capital. Not only that, but the company is utilizing 80% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

The Bottom Line On NetDragon Websoft Holdings' ROCE

To the delight of most shareholders, NetDragon Websoft Holdings has now broken into profitability. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

On a final note, we've found 1 warning sign for NetDragon Websoft Holdings that we think you should be aware of.

While NetDragon Websoft Holdings 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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