Returns On Capital Signal Tricky Times Ahead For Inmyshow Digital Technology(Group)Co.Ltd (SHSE:600556)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Inmyshow Digital Technology(Group)Co.Ltd (SHSE:600556) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Inmyshow Digital Technology(Group)Co.Ltd:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.04 = CN¥153m ÷ (CN¥5.8b - CN¥1.9b) (Based on the trailing twelve months to September 2023).

Thus, Inmyshow Digital Technology(Group)Co.Ltd has an ROCE of 4.0%. In absolute terms, that's a low return but it's around the Media industry average of 4.9%.

View our latest analysis for Inmyshow Digital Technology(Group)Co.Ltd

Above you can see how the current ROCE for Inmyshow Digital Technology(Group)Co.Ltd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Inmyshow Digital Technology(Group)Co.Ltd .

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Inmyshow Digital Technology(Group)Co.Ltd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 4.0% from 21% five years ago. However it looks like Inmyshow Digital Technology(Group)Co.Ltd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 33%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 4.0%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

Our Take On Inmyshow Digital Technology(Group)Co.Ltd's ROCE

To conclude, we've found that Inmyshow Digital Technology(Group)Co.Ltd is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 55% in the last three years. Therefore based on the analysis done in this article, we don't think Inmyshow Digital Technology(Group)Co.Ltd has the makings of a multi-bagger.

Inmyshow Digital Technology(Group)Co.Ltd does have some risks though, and we've spotted 2 warning signs for Inmyshow Digital Technology(Group)Co.Ltd that you might be interested in.

While Inmyshow Digital Technology(Group)Co.Ltd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.