Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Alibaba Pictures Group (HKG:1060) and its trend of ROCE, we really liked what we saw.
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. The formula for this calculation on Alibaba Pictures Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.031 = CN¥460m ÷ (CN¥18b - CN¥2.8b) (Based on the trailing twelve months to September 2023).
So, Alibaba Pictures Group has an ROCE of 3.1%. In absolute terms, that's a low return and it also under-performs the Entertainment industry average of 6.5%.
Check out our latest analysis for Alibaba Pictures Group
In the above chart we have measured Alibaba Pictures Group'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 Alibaba Pictures Group.
How Are Returns Trending?
We're delighted to see that Alibaba Pictures Group is reaping rewards from its investments and has now broken into profitability. The company now earns 3.1% on its capital, because five years ago it was incurring losses. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.
The Bottom Line
In summary, we're delighted to see that Alibaba Pictures Group has been able to increase efficiencies and earn higher rates of return on the same amount of capital. However the stock is down a substantial 71% in the last five years so there could be other areas of the business hurting its prospects. Still, it's worth doing some further research to see if the trends will continue into the future.
On a final note, we've found 2 warning signs for Alibaba Pictures Group that we think you should be aware of.
While Alibaba Pictures Group 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.
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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.