Global Digital Creations Holdings (HKG:8271) Might Have The Makings Of A Multi-Bagger

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Global Digital Creations Holdings (HKG:8271) so let's look a bit deeper.

Understanding 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. Analysts use this formula to calculate it for Global Digital Creations Holdings:

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

0.014 = HK$5.1m ÷ (HK$661m - HK$292m) (Based on the trailing twelve months to September 2021).

Therefore, Global Digital Creations Holdings has an ROCE of 1.4%. In absolute terms, that's a low return and it also under-performs the Entertainment industry average of 11%.

See our latest analysis for Global Digital Creations Holdings

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

The Trend Of ROCE

We're delighted to see that Global Digital Creations Holdings is reaping rewards from its investments and has now broken into profitability. While the business is profitable now, it used to be incurring losses on invested capital five years ago. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 64%. Global Digital Creations Holdings could be selling under-performing assets since the ROCE is improving.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 44% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.

In Conclusion...

From what we've seen above, Global Digital Creations Holdings has managed to increase it's returns on capital all the while reducing it's capital base. Astute investors may have an opportunity here because the stock has declined 69% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Global Digital Creations Holdings does have some risks though, and we've spotted 2 warning signs for Global Digital Creations Holdings that you might be interested in.

While Global Digital Creations 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.