Global Digital Creations Holdings' (HKG:8271) Returns On Capital Are Heading Higher

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Speaking of which, we noticed some great changes in Global Digital Creations Holdings' (HKG:8271) returns on capital, so let's have a look.

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 Global Digital Creations Holdings, this is the formula:

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

0.0019 = HK$714k ÷ (HK$661m - HK$290m) (Based on the trailing twelve months to September 2022).

So, Global Digital Creations Holdings has an ROCE of 0.2%. In absolute terms, that's a low return and it also under-performs the Entertainment industry average of 7.8%.

See our latest analysis for Global Digital Creations Holdings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Global Digital Creations Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Like most people, we're pleased that Global Digital Creations Holdings is now generating some pretax earnings. The company was generating losses five years ago, but now it's turned around, earning 0.2% which is no doubt a relief for some early shareholders. In regards to capital employed, Global Digital Creations Holdings is using 59% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. This could potentially mean that the company is selling some of its assets.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 44% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

Our Take On Global Digital Creations Holdings' ROCE

In the end, Global Digital Creations Holdings has proven it's capital allocation skills are good with those higher returns from less amount of capital. Astute investors may have an opportunity here because the stock has declined 55% 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 come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is potentially serious...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.