Global Digital Creations Holdings (HKG:8271) Shareholders Will Want The ROCE Trajectory To Continue

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Global Digital Creations Holdings (HKG:8271) looks quite promising in regards to its trends of return on capital.

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. The formula for this calculation on Global Digital Creations Holdings is:

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

0.024 = HK$8.9m ÷ (HK$661m - HK$290m) (Based on the trailing twelve months to June 2022).

Therefore, Global Digital Creations Holdings has an ROCE of 2.4%. Ultimately, that's a low return and it under-performs the Entertainment industry average of 8.3%.

Check out 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.

The Trend Of ROCE

It's nice to see that ROCE is headed in the right direction, even if it is still relatively low. We found that the returns on capital employed over the last five years have risen by 425%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Speaking of capital employed, the company is actually utilizing 59% less than it was five years ago, which can be indicative of a business that's improving its efficiency. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

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. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

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 50% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.

On a final note, we've found 3 warning signs for Global Digital Creations Holdings that we think you should be aware of.

While Global Digital Creations Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.