Investors Could Be Concerned With Zhejiang Century Huatong GroupLtd's (SZSE:002602) Returns On Capital

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. 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. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. On that note, looking into Zhejiang Century Huatong GroupLtd (SZSE:002602), we weren't too upbeat about how things were going.

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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. Analysts use this formula to calculate it for Zhejiang Century Huatong GroupLtd:

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

0.085 = CN¥2.5b ÷ (CN¥39b - CN¥11b) (Based on the trailing twelve months to September 2024).

So, Zhejiang Century Huatong GroupLtd has an ROCE of 8.5%. On its own that's a low return, but compared to the average of 5.3% generated by the Entertainment industry, it's much better.

See our latest analysis for Zhejiang Century Huatong GroupLtd

In the above chart we have measured Zhejiang Century Huatong GroupLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Zhejiang Century Huatong GroupLtd .

The Trend Of ROCE

There is reason to be cautious about Zhejiang Century Huatong GroupLtd, given the returns are trending downwards. To be more specific, the ROCE was 13% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Zhejiang Century Huatong GroupLtd becoming one if things continue as they have.

Our Take On Zhejiang Century Huatong GroupLtd's ROCE

In summary, it's unfortunate that Zhejiang Century Huatong GroupLtd is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 32% 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 Century Huatong GroupLtd does come with some risks, and we've found 1 warning sign that you should be aware of.

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.