Cathay Media and Education Group (HKG: 1981) may have difficulty using its capital efficiently

What trends should we look for if we are to identify stocks that can multiply in value over the long term? In a perfect world, we would like a business to invest more capital in their business, and ideally the returns from that capital increase as well. If you see this, it usually means it’s a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigation Cathay Media and Education Group (HKG: 1981), we don’t think current trends fit the mold of a multi-bagger.

What is Return on Employee Capital (ROCE)?

Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. To calculate this metric for Cathay Media and Education Group, here is the formula:

Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)

0.08 = CN ¥ 252m ÷ (CN ¥ 3.6b – CN ¥ 435m) (Based on the last twelve months up to June 2021).

Thereby, Cathay Media and Education Group posted a ROCE of 8.0%. Ultimately, that’s a low return and it’s below the entertainment industry average of 11%.

Check out our latest review for Cathay Media and Education Group

SEHK: 1981 Return on capital employed on December 27, 2021

Above you can see how Cathay Media and Education Group’s current ROCE compares to its previous returns on equity, but there is little you can say about the past. If you are interested, you can view analyst forecasts in our free analyst forecast report for the company.

What is the trend for returns?

On the surface, the ROCE trend at Cathay Media and Education Group does not inspire confidence. To be more precise, ROCE has increased from 14% over the past three years. However, as both capital employed and income have increased, it appears that the company is currently continuing to grow, resulting in short-term returns. And if the capital increase generates additional returns, the company, and therefore shareholders, will benefit in the long run.

In addition, Cathay Media and Education Group has done well to reduce its current liabilities to 12% of total assets. So we could link some of that to the decrease in ROCE. In addition, it can reduce some aspects of the risk to the business, as the company’s suppliers or short-term creditors are now less funding its operations. Some would argue that this reduces the company’s efficiency in generating ROCE, as it now finances a greater portion of operations with its own money.

The result on the ROCE of Cathay Media and Education Group

Although returns on capital have declined in the short term, we find promise that both revenue and capital employed have increased for Cathay Media and Education Group. These growth trends have not led to growth returns, however, as the stock has fallen 69% in the past year. Accordingly, we recommend that you dig deeper into this stock to find out what other business fundamentals can show us.

One more thing: we have identified 3 warning signs with Cathay Media and Education Group (at least 1 which is a little nasty), and understanding them would definitely be helpful.

If you want to look for solid businesses with great income, check out this free list of companies with good balance sheets and impressive returns on equity.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.

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