What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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 Hunan TV & Broadcast Intermediary (SZSE:000917) and its trend of ROCE, we really liked what we saw.
Understanding 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 Hunan TV & Broadcast Intermediary, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0069 = CN¥99m ÷ (CN¥17b - CN¥2.8b) (Based on the trailing twelve months to March 2024).
Therefore, Hunan TV & Broadcast Intermediary has an ROCE of 0.7%. Ultimately, that's a low return and it under-performs the Media industry average of 4.0%.
Above you can see how the current ROCE for Hunan TV & Broadcast Intermediary 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 Hunan TV & Broadcast Intermediary for free.
What The Trend Of ROCE Can Tell Us
We're delighted to see that Hunan TV & Broadcast Intermediary is reaping rewards from its investments and has now broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 0.7% on its capital. 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. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.
One more thing to note, Hunan TV & Broadcast Intermediary has decreased current liabilities to 16% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.
The Bottom Line On Hunan TV & Broadcast Intermediary's ROCE
To bring it all together, Hunan TV & Broadcast Intermediary has done well to increase the returns it's generating from its capital employed. Astute investors may have an opportunity here because the stock has declined 30% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.
If you want to continue researching Hunan TV & Broadcast Intermediary, you might be interested to know about the 1 warning sign that our analysis has discovered.
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.