There's Been No Shortage Of Growth Recently For NetDragon Websoft Holdings' (HKG:777) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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)?

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. 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)

0.13 = CN¥1.1b ÷ (CN¥12b - CN¥3.2b) (Based on the trailing twelve months to June 2023).

Therefore, NetDragon Websoft Holdings has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 6.5% generated by the Entertainment industry.

See our latest analysis for NetDragon Websoft Holdings

In the above chart we have measured NetDragon Websoft Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From NetDragon Websoft Holdings' ROCE Trend?

NetDragon Websoft Holdings is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 13%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 69%. So we're very much inspired by what we're seeing at NetDragon Websoft Holdings thanks to its ability to profitably reinvest capital.

In Conclusion...

All in all, it's terrific to see that NetDragon Websoft Holdings is reaping the rewards from prior investments and is growing its capital base. Considering the stock has delivered 8.8% to its stockholders over the last five 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.

One more thing, we've spotted 2 warning signs facing NetDragon Websoft Holdings that you might find interesting.

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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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.