Is Newborn Town (HKG:9911) Likely To Turn Things Around?

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Newborn Town (HKG:9911) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Newborn Town is:

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

0.041 = CN¥41m ÷ (CN¥1.2b - CN¥170m) (Based on the trailing twelve months to June 2020).

Therefore, Newborn Town has an ROCE of 4.1%. In absolute terms, that's a low return, but it's much better than the Software industry average of 3.4%.

Check out our latest analysis for Newborn Town

In the above chart we have measured Newborn Town'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 Newborn Town.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Newborn Town, we didn't gain much confidence. Over the last three years, returns on capital have decreased to 4.1% from 6.7% three years ago. However it looks like Newborn Town might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On Newborn Town's ROCE

To conclude, we've found that Newborn Town is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 247% return in the last year, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

On a final note, we've found 1 warning sign for Newborn Town that we think you should be aware of.

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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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