If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. So on that note, Maoyan Entertainment (HKG:1896) looks quite promising in regards to its trends of return on capital.
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. To calculate this metric for Maoyan Entertainment, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = CN¥1.1b ÷ (CN¥13b - CN¥3.4b) (Based on the trailing twelve months to December 2023).
Therefore, Maoyan Entertainment has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 6.2% generated by the Entertainment industry.
Above you can see how the current ROCE for Maoyan Entertainment compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Maoyan Entertainment .
What The Trend Of ROCE Can Tell Us
We're delighted to see that Maoyan Entertainment is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 12% which is a sight for sore eyes. Not only that, but the company is utilizing 55% more capital than before, but that's to be expected from a company 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.
Our Take On 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 37% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.
On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation for 1896 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.
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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.