The Return Trends At Global Digital Creations Holdings (HKG:8271) Look Promising

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Global Digital Creations Holdings (HKG:8271) and its trend of ROCE, we really liked what we saw.

What is 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 Global Digital Creations Holdings is:

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

0.0092 = HK$3.3m ÷ (HK$650m - HK$294m) (Based on the trailing twelve months to December 2020).

So, Global Digital Creations Holdings has an ROCE of 0.9%. Ultimately, that's a low return and it under-performs the Entertainment industry average of 13%.

View 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.

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. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 0.9% on their capital employed. Additionally, the business is utilizing 66% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. 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. Effectively this means that suppliers or short-term creditors are now funding 45% of the business, which is more than it was five years ago. 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.

What We Can Learn From Global Digital Creations Holdings' ROCE

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 60% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.

One more thing, we've spotted 2 warning signs facing Global Digital Creations Holdings that you might find interesting.

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. 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.
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