Should We Be Excited About The Trends Of Returns At Icon Culture Global (HKG:8500)?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. 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 Icon Culture Global (HKG:8500), they do have a high ROCE, but we weren't exactly elated from how returns are trending.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Icon Culture Global, this is the formula:

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

0.33 = CN¥25m ÷ (CN¥156m - CN¥79m) (Based on the trailing twelve months to September 2020).

Thus, Icon Culture Global has an ROCE of 33%. That's a fantastic return and not only that, it outpaces the average of 12% earned by companies in a similar industry.

See our latest analysis for Icon Culture Global

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 Icon Culture Global's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Icon Culture Global's ROCE Trend?

Over the past two years, Icon Culture Global's ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So it may not be a multi-bagger in the making, but given the decent 33% return on capital, it'd be difficult to find fault with the business's current operations.

Another point to note, we noticed the company has increased current liabilities over the last two years. This is intriguing because if current liabilities hadn't increased to 51% of total assets, this reported ROCE would probably be less than33% because total capital employed would be higher.The 33% ROCE could be even lower if current liabilities weren't 51% of total assets, because the the formula would show a larger base of total capital employed. So with current liabilities at such high levels, this effectively means the likes of suppliers or short-term creditors are funding a meaningful part of the business, which in some instances can bring some risks.

Our Take On Icon Culture Global's ROCE

In summary, Icon Culture Global isn't compounding its earnings but is generating decent returns on the same amount of capital employed. And in the last year, the stock has given away 10% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you'd like to know about the risks facing Icon Culture Global, we've discovered 3 warning signs that you should be aware of.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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