Investors Shouldn't Overlook Creative China Holdings' (HKG:8368) Impressive Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. With that in mind, the ROCE of Creative China Holdings (HKG:8368) looks great, so lets see what the trend can tell us.

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. To calculate this metric for Creative China Holdings, this is the formula:

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

0.28 = CN¥32m ÷ (CN¥223m - CN¥106m) (Based on the trailing twelve months to March 2021).

Thus, Creative China Holdings has an ROCE of 28%. In absolute terms that's a great return and it's even better than the Entertainment industry average of 15%.

See our latest analysis for Creative China Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Creative China Holdings' ROCE against it's prior returns. If you're interested in investigating Creative China Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Creative China Holdings Tell Us?

Creative China Holdings has not disappointed with their ROCE growth. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 330% in that same time. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

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. The current liabilities has increased to 48% 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.

The Key Takeaway

To sum it up, Creative China Holdings is collecting higher returns from the same amount of capital, and that's impressive. Although the company may be facing some issues elsewhere since the stock has plunged 99% in the last five years. Still, it's worth doing some further research to see if the trends will continue into the future.

One more thing, we've spotted 2 warning signs facing Creative China Holdings that you might find interesting.

Creative China Holdings is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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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