Returns At Zhejiang Juli Culture DevelopmentLtd (SZSE:002247) Are On The Way Up

There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Zhejiang Juli Culture DevelopmentLtd (SZSE:002247) so let's look a bit deeper.

Understanding 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. To calculate this metric for Zhejiang Juli Culture DevelopmentLtd, this is the formula:

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

0.19 = CN¥80m ÷ (CN¥1.1b - CN¥669m) (Based on the trailing twelve months to March 2024).

So, Zhejiang Juli Culture DevelopmentLtd has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Entertainment industry average of 5.2% it's much better.

View our latest analysis for Zhejiang Juli Culture DevelopmentLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zhejiang Juli Culture DevelopmentLtd's ROCE against it's prior returns. If you're interested in investigating Zhejiang Juli Culture DevelopmentLtd's past further, check out this free graph covering Zhejiang Juli Culture DevelopmentLtd's past earnings, revenue and cash flow.

So How Is Zhejiang Juli Culture DevelopmentLtd's ROCE Trending?

It's great to see that Zhejiang Juli Culture DevelopmentLtd has started to generate some pre-tax earnings from prior investments. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 19% on their capital employed. Additionally, the business is utilizing 79% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 61% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

Our Take On Zhejiang Juli Culture DevelopmentLtd's ROCE

In the end, Zhejiang Juli Culture DevelopmentLtd has proven it's capital allocation skills are good with those higher returns from less amount of capital. Given the stock has declined 46% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One more thing, we've spotted 1 warning sign facing Zhejiang Juli Culture DevelopmentLtd that you might find interesting.

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.