What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. With that in mind, we've noticed some promising trends at Mei Ah Entertainment Group (HKG:391) so let's look a bit deeper.
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. Analysts use this formula to calculate it for Mei Ah Entertainment Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0053 = HK$2.7m ÷ (HK$661m - HK$144m) (Based on the trailing twelve months to March 2024).
Thus, Mei Ah Entertainment Group has an ROCE of 0.5%. In absolute terms, that's a low return and it also under-performs the Entertainment industry average of 11%.
Check out our latest analysis for Mei Ah Entertainment Group
Historical performance is a great place to start when researching a stock so above you can see the gauge for Mei Ah Entertainment Group's 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 Mei Ah Entertainment Group.
What Can We Tell From Mei Ah Entertainment Group's ROCE Trend?
We're delighted to see that Mei Ah Entertainment Group is reaping rewards from its investments and has now broken into profitability. The company now earns 0.5% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Mei Ah Entertainment 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
To bring it all together, Mei Ah Entertainment Group has done well to increase the returns it's generating from its capital employed. Given the stock has declined 40% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.
Like most companies, Mei Ah Entertainment Group does come with some risks, and we've found 1 warning sign that you should be aware of.
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.