Some Investors May Be Worried About 7Road Holdings' (HKG:797) 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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. In light of that, when we looked at 7Road Holdings (HKG:797) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. The formula for this calculation on 7Road Holdings is:

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

0.065 = CN¥147m ÷ (CN¥2.6b - CN¥371m) (Based on the trailing twelve months to June 2023).

So, 7Road Holdings has an ROCE of 6.5%. In absolute terms, that's a low return but it's around the Entertainment industry average of 6.9%.

Check out our latest analysis for 7Road Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for 7Road Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of 7Road Holdings, check out these free graphs here.

What Does the ROCE Trend For 7Road Holdings Tell Us?

In terms of 7Road Holdings' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 31% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, 7Road Holdings has decreased its current liabilities to 14% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for 7Road Holdings. Furthermore the stock has climbed 60% over the last five years, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.

Like most companies, 7Road Holdings does come with some risks, and we've found 1 warning sign that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.