What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Maoyan Entertainment (HKG:1896) so let's look a bit deeper.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its 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%. On its own that's a low return, but compared to the average of 8.1% generated by the Online Retail industry, it's much better.

Check out 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, you can check out the forecasts from the analysts covering Maoyan Entertainment here for free.

The Trend Of ROCE

The fact that Maoyan Entertainment is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 9.7% which is a sight for sore eyes. In addition to that, Maoyan Entertainment is employing 23,598% more capital than previously which is expected of a company that's trying to break into profitability. 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.

One more thing to note, Maoyan Entertainment has decreased current liabilities to 26% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Maoyan Entertainment has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

Our Take On Maoyan Entertainment's ROCE

In summary, it's great to see that Maoyan Entertainment has managed to break into profitability and is continuing to reinvest in its business. And since the stock has fallen 48% over the last three years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation on our platform that is definitely worth checking out.

While Maoyan Entertainment may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.