To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Alibaba Pictures Group's (HKG:1060) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What Is It?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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%. Ultimately, that's a low return and it under-performs the Entertainment industry average of 6.2%.
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're interested, you can view the analysts predictions in our free analyst report for Alibaba Pictures Group .
What The Trend Of ROCE Can Tell Us
Shareholders will be relieved that Alibaba Pictures Group has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 3.1%, which is always encouraging. While returns have increased, the amount of capital employed by Alibaba Pictures Group has remained flat over the period. 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. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.
The Bottom Line
As discussed above, Alibaba Pictures Group appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. 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.
If you want to continue researching Alibaba Pictures Group, you might be interested to know about the 2 warning signs that our analysis has discovered.
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.