Investors Will Want Maoyan Entertainment’s (HKG:1896) Growth In ROCE To Persist

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we’ll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. So when we looked at Maoyan Entertainment (HKG:1896) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

For those that aren’t sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the 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%. In absolute terms, that’s a satisfactory return, but compared to the Entertainment industry average of 6.6% it’s much better.

Check out our latest analysis for Maoyan Entertainment

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’d like, you can check out the forecasts from the analysts covering Maoyan Entertainment for free.

What Does the ROCE Trend For Maoyan Entertainment Tell Us?

Maoyan Entertainment has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it’s earning 12% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Maoyan Entertainment is utilizing 55% more capital than it was five years ago. This can indicate that there’s plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

The Bottom Line On Maoyan Entertainment’s ROCE

Overall, Maoyan Entertainment gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And since the stock has fallen 39% over the last five years, there might be an opportunity here. That being the case, research into the company’s current valuation metrics and future prospects seems fitting.

Before jumping to any conclusions though, we need to know what value we’re getting for the current share price. That’s where you can check out our FREE intrinsic value estimation for 1896 that compares the share price and estimated value.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.

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