Poly Culture Group (HKG:3636) may have problems allocating its capital
Finding a business that has the potential to grow significantly isn’t easy, but it is possible if we look at a few key financial metrics. Among other things, we will want to see two things; first, growth to return to on capital employed (ROCE) and on the other hand, an expansion of the quantity capital employed. Simply put, these types of businesses are slot machines, meaning they continually reinvest their profits at ever-higher rates of return. That said, at a first glance at Poly Culture Group (HKG:3636) we’re not jumping out of our chairs on the yield trend, but taking a closer look.
What is return on capital employed (ROCE)?
For those unaware, ROCE is a measure of a company’s annual pre-tax profit (yield), relative to the capital employed in the business. The formula for this calculation on Groupe Poly Culture is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.039 = CN¥227m ÷ (CN¥15b – CN¥9.0b) (Based on the last twelve months to September 2021).
Therefore, Groupe Poly Culture posted a ROCE of 3.9%. In absolute terms, that’s a weak return, and it’s also below the entertainment industry average of 11%.
See our latest analysis for Poly Culture Group
Although the past is not indicative of the future, it can be useful to know the historical performance of a company, which is why we have this graph above. If you want to investigate more about Poly Culture Group’s past, check out this free chart of past profits, revenue and cash flow.
So, what is the ROCE trend of Poly Culture Group?
On the surface, the ROCE trend at Poly Culture Group does not inspire confidence. About five years ago, the return on capital was 8.8%, but since then it has fallen to 3.9%. Although, given that revenue and the amount of assets used in the business have increased, it could suggest that the business is investing in growth and that the additional capital has resulted in a short-term reduction in ROCE. And if the capital increase generates additional returns, the company, and therefore the shareholders, will benefit in the long term.
Furthermore, Poly Culture Group’s current liabilities have increased over the past five years to reach 61% of total assets, which has had the effect of distorting the ROCE to some extent. Without this increase, it is likely that the ROCE would still be below 3.9%. This means that in reality a fairly large part of the activity is financed by suppliers or short-term creditors of the company, which can entail certain risks.
Although returns to capital have declined in the short term, we find it promising that both revenue and capital employed have increased for Poly Culture Group. These growth trends have not led to returns to growth, however, as the stock has fallen 68% over the past five years. Accordingly, we recommend that you research this stock further to find out what other company fundamentals can show us.
One more thing we spotted 2 warning signs in front of Poly Culture Group which might interest you.
Although Poly Culture Group does not currently generate the highest returns, we have compiled a list of companies that currently generate more than 25% return on equity. look at this free list here.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.