Zhejiang Huamei Holding (SZSE:000607) Will Be Hoping To Turn Its Returns On Capital Around

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Basically the company is earning less on its investments and it is also reducing its total assets. On that note, looking into Zhejiang Huamei Holding (SZSE:000607), we weren't too upbeat about how things were going.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Zhejiang Huamei Holding is:

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

0.011 = CN¥23m ÷ (CN¥3.5b - CN¥1.3b) (Based on the trailing twelve months to September 2024).

So, Zhejiang Huamei Holding has an ROCE of 1.1%. Ultimately, that's a low return and it under-performs the Media industry average of 5.2%.

View our latest analysis for Zhejiang Huamei Holding

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're interested in investigating Zhejiang Huamei Holding's past further, check out this free graph covering Zhejiang Huamei Holding's past earnings, revenue and cash flow.

So How Is Zhejiang Huamei Holding's ROCE Trending?

There is reason to be cautious about Zhejiang Huamei Holding, given the returns are trending downwards. About five years ago, returns on capital were 5.7%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Zhejiang Huamei Holding becoming one if things continue as they have.

In Conclusion...

In summary, it's unfortunate that Zhejiang Huamei Holding is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 25% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Like most companies, Zhejiang Huamei Holding does come with some risks, and we've found 2 warning signs that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.