Dinglong CultureLtd (SZSE:002502) Is Finding It Tricky To Allocate Its Capital

When researching a stock for investment, what can tell us that the company is in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. And from a first read, things don't look too good at Dinglong CultureLtd (SZSE:002502), so let's see why.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Dinglong CultureLtd, this is the formula:

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

0.0061 = CN¥12m ÷ (CN¥2.3b - CN¥341m) (Based on the trailing twelve months to September 2023).

Thus, Dinglong CultureLtd has an ROCE of 0.6%. Ultimately, that's a low return and it under-performs the Entertainment industry average of 3.8%.

See our latest analysis for Dinglong CultureLtd

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 Dinglong CultureLtd's past further, check out this free graph covering Dinglong CultureLtd's past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of Dinglong CultureLtd's historical ROCE trend, it isn't fantastic. Unfortunately, returns have declined substantially over the last five years to the 0.6% we see today. What's equally concerning is that the amount of capital deployed in the business has shrunk by 42% over that same period. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.

The Bottom Line On Dinglong CultureLtd's ROCE

In summary, it's unfortunate that Dinglong CultureLtd is shrinking its capital base and also generating lower returns. Long term shareholders who've owned the stock over the last five years have experienced a 54% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Dinglong CultureLtd could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 002502 on our platform quite valuable.

While Dinglong CultureLtd 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.