Returns At Maoyan Entertainment (HKG:1896) Are On The Way Up

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. 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 Maoyan Entertainment's (HKG:1896) returns on capital, so let's have a look.

What is 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. Analysts use this formula to calculate it for Maoyan Entertainment:

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

0.097 = CN¥787m ÷ (CN¥11b - CN¥2.9b) (Based on the trailing twelve months to December 2021).

Thus, Maoyan Entertainment has an ROCE of 9.7%. In absolute terms, that's a low return, but it's much better than the Online Retail industry average of 6.9%.

View our latest analysis for Maoyan Entertainment

In the above chart we have measured Maoyan Entertainment's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Maoyan Entertainment.

What Can We Tell From Maoyan Entertainment's ROCE Trend?

Maoyan Entertainment has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 9.7% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Maoyan Entertainment is utilizing 23,598% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

On a related note, the company's ratio of current liabilities to total assets has decreased to 26%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

What We Can Learn From Maoyan Entertainment's ROCE

Long story short, we're delighted to see that Maoyan Entertainment's reinvestment activities have paid off and the company is now profitable. And since the stock has fallen 48% over the last three years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Like most companies, Maoyan Entertainment does come with some risks, and we've found 1 warning sign that you should be aware of.

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. 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.