Wanda Film Holding's (SZSE:002739) Returns On Capital Not Reflecting Well On The Business

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. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. In light of that, from a first glance at Wanda Film Holding (SZSE:002739), we've spotted some signs that it could be struggling, so let's investigate.

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. Analysts use this formula to calculate it for Wanda Film Holding:

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

0.034 = CN¥595m ÷ (CN¥25b - CN¥7.7b) (Based on the trailing twelve months to September 2024).

Thus, Wanda Film Holding has an ROCE of 3.4%. In absolute terms, that's a low return and it also under-performs the Entertainment industry average of 5.3%.

View our latest analysis for Wanda Film Holding

In the above chart we have measured Wanda Film Holding'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 Wanda Film Holding .

So How Is Wanda Film Holding's ROCE Trending?

The trend of ROCE at Wanda Film Holding is showing some signs of weakness. To be more specific, today's ROCE was 5.8% five years ago but has since fallen to 3.4%. On top of that, the business is utilizing 24% less capital within its operations. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

What We Can Learn From Wanda Film Holding's ROCE

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. Long term shareholders who've owned the stock over the last five years have experienced a 33% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Wanda Film Holding could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 002739 on our platform quite valuable.

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.