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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at 7Road Holdings (HKG:797) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for 7Road Holdings, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.036 = CN¥70m ÷ (CN¥2.3b - CN¥349m) (Based on the trailing twelve months to December 2023).

So, 7Road Holdings has an ROCE of 3.6%. Ultimately, that's a low return and it under-performs the Entertainment industry average of 6.6%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for 7Road Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of 7Road Holdings.

So How Is 7Road Holdings' ROCE Trending?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. Over the last five years, returns on capital employed have risen substantially to 3.6%. Basically the business is earning more per dollar of capital invested and in addition to that, 56% more capital is being employed now too. So we're very much inspired by what we're seeing at 7Road Holdings thanks to its ability to profitably reinvest capital.

In Conclusion...

To sum it up, 7Road Holdings has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 53% return over the last five years. In light of that, we think it's worth looking further into this stock because if 7Road Holdings can keep these trends up, it could have a bright future ahead.

While 7Road Holdings looks impressive, no company is worth an infinite price. The intrinsic value infographic for 797 helps visualize whether it is currently trading for a fair price.

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.

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