There Are Reasons To Feel Uneasy About China Science Publishing & Media's (SHSE:601858) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 China Science Publishing & Media (SHSE:601858) 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)?

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 China Science Publishing & Media is:

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

0.063 = CN¥344m ÷ (CN¥7.0b - CN¥1.5b) (Based on the trailing twelve months to September 2024).

Therefore, China Science Publishing & Media has an ROCE of 6.3%. On its own that's a low return, but compared to the average of 5.2% generated by the Media industry, it's much better.

View our latest analysis for China Science Publishing & Media

Historical performance is a great place to start when researching a stock so above you can see the gauge for China Science Publishing & Media's ROCE against it's prior returns. If you'd like to look at how China Science Publishing & Media has performed in the past in other metrics, you can view this free graph of China Science Publishing & Media's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of China Science Publishing & Media's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 9.0%, but since then they've fallen to 6.3%. 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.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by China Science Publishing & Media's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 73% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One more thing to note, we've identified 1 warning sign with China Science Publishing & Media and understanding this should be part of your investment process.

While China Science Publishing & Media isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.