There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Medialink Group (HKG:2230) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
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 Medialink Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = HK$90m ÷ (HK$922m - HK$328m) (Based on the trailing twelve months to March 2024).
So, Medialink Group has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Interactive Media and Services industry average of 8.4% it's much better.
See our latest analysis for Medialink Group
Historical performance is a great place to start when researching a stock so above you can see the gauge for Medialink Group's ROCE against it's prior returns. If you're interested in investigating Medialink Group's past further, check out this free graph covering Medialink Group's past earnings, revenue and cash flow.
How Are Returns Trending?
On the surface, the trend of ROCE at Medialink Group doesn't inspire confidence. Over the last five years, returns on capital have decreased to 15% from 51% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.
Our Take On Medialink Group's ROCE
To conclude, we've found that Medialink Group is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 31% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.
Medialink Group does have some risks, we noticed 4 warning signs (and 2 which are a bit unpleasant) we think you should know about.
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.