Shaanxi Broadcast & TV Network Intermediary(Group)Co.Ltd (SHSE:600831) Is Reinvesting At Lower Rates Of Return

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. 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 Shaanxi Broadcast & TV Network Intermediary(Group)Co.Ltd (SHSE:600831) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. The formula for this calculation on Shaanxi Broadcast & TV Network Intermediary(Group)Co.Ltd is:

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

0.012 = CN¥85m ÷ (CN¥12b - CN¥4.9b) (Based on the trailing twelve months to September 2023).

Thus, Shaanxi Broadcast & TV Network Intermediary(Group)Co.Ltd has an ROCE of 1.2%. Ultimately, that's a low return and it under-performs the Media industry average of 4.8%.

View our latest analysis for Shaanxi Broadcast & TV Network Intermediary(Group)Co.Ltd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Shaanxi Broadcast & TV Network Intermediary(Group)Co.Ltd.

The Trend Of ROCE

On the surface, the trend of ROCE at Shaanxi Broadcast & TV Network Intermediary(Group)Co.Ltd doesn't inspire confidence. Around five years ago the returns on capital were 4.6%, but since then they've fallen to 1.2%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a separate but related note, it's important to know that Shaanxi Broadcast & TV Network Intermediary(Group)Co.Ltd has a current liabilities to total assets ratio of 40%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

From the above analysis, we find it rather worrisome that returns on capital and sales for Shaanxi Broadcast & TV Network Intermediary(Group)Co.Ltd have fallen, meanwhile the business is employing more capital than it was five years ago. Unsurprisingly then, the stock has dived 72% over the last five years, so investors are recognizing these changes and don't like the company's prospects. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing to note, we've identified 2 warning signs with Shaanxi Broadcast & TV Network Intermediary(Group)Co.Ltd and understanding these should be part of your investment process.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.