Be Wary Of Archosaur Games (HKG:9990) And Its Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Archosaur Games (HKG:9990), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What is it?

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. To calculate this metric for Archosaur Games, this is the formula:

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

0.027 = CN¥98m ÷ (CN¥4.0b - CN¥310m) (Based on the trailing twelve months to December 2020).

So, Archosaur Games has an ROCE of 2.7%. In absolute terms, that's a low return and it also under-performs the Entertainment industry average of 15%.

See our latest analysis for Archosaur Games

Above you can see how the current ROCE for Archosaur Games compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Archosaur Games.

What The Trend Of ROCE Can Tell Us

In terms of Archosaur Games' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 34% over the last three years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Archosaur Games has done well to pay down its current liabilities to 7.8% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Archosaur Games. And there could be an opportunity here if other metrics look good too, because the stock has declined 36% in the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

While Archosaur Games doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.

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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