What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. 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 investigating Joy Spreader Group (HKG:6988), we don't think it's current trends fit the mold of a multi-bagger.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Joy Spreader Group, this is the formula:

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

0.11 = HK$262m ÷ (HK$2.5b - HK$138m) (Based on the trailing twelve months to December 2021).

Thus, Joy Spreader Group has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Media industry average of 8.1% it's much better.

Check out our latest analysis for Joy Spreader Group

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 Joy Spreader Group's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Joy Spreader Group's ROCE Trend?

On the surface, the trend of ROCE at Joy Spreader Group doesn't inspire confidence. To be more specific, ROCE has fallen from 54% over the last five 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 related note, Joy Spreader Group has decreased its current liabilities to 5.6% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Joy Spreader Group's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Joy Spreader Group is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 3.4% over the last year. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

One more thing: We've identified 2 warning signs with Joy Spreader Group (at least 1 which is concerning) , and understanding them would certainly be useful.

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.