The Returns On Capital At Zhejiang Century Huatong GroupLtd (SZSE:002602) Don't Inspire Confidence

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. Although, when we looked at Zhejiang Century Huatong GroupLtd (SZSE:002602), it didn't seem to tick all of these boxes.

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 Zhejiang Century Huatong GroupLtd is:

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

0.068 = CN¥2.0b ÷ (CN¥38b - CN¥8.7b) (Based on the trailing twelve months to March 2024).

So, Zhejiang Century Huatong GroupLtd has an ROCE of 6.8%. On its own that's a low return, but compared to the average of 5.4% generated by the Entertainment industry, it's much better.

View 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're interested, you can view the analysts predictions in our free analyst report for Zhejiang Century Huatong GroupLtd .

What Can We Tell From Zhejiang Century Huatong GroupLtd's ROCE Trend?

In terms of Zhejiang Century Huatong GroupLtd's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 8.8% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Zhejiang Century Huatong GroupLtd's current liabilities have increased over the last five years to 23% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 6.8%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Zhejiang Century Huatong GroupLtd. And there could be an opportunity here if other metrics look good too, because the stock has declined 56% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

While Zhejiang Century Huatong GroupLtd doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation for 002602 on our platform.

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.

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