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

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing 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)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed 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)

0.015 = HK$5.9m ÷ (HK$690m - HK$299m) (Based on the trailing twelve months to March 2022).

Therefore, Global Digital Creations Holdings has an ROCE of 1.5%. In absolute terms, that's a low return and it also under-performs the Entertainment industry average of 7.2%.

Check out 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'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 great to see that Global Digital Creations Holdings has started to generate some pre-tax earnings from prior investments. The company was generating losses five years ago, but now it's turned around, earning 1.5% which is no doubt a relief for some early shareholders. 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 56%. Global Digital Creations Holdings could be selling under-performing assets since the ROCE is improving.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 43% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

What We Can Learn From Global Digital Creations Holdings' ROCE

In a nutshell, we're pleased to see that Global Digital Creations Holdings has been able to generate higher returns from less capital. Astute investors may have an opportunity here because the stock has declined 66% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

On a separate note, we've found 2 warning signs for Global Digital Creations Holdings you'll probably want to know about.

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.