Investors Could Be Concerned With Zhejiang Huace Film & TV's (SZSE:300133) Returns On Capital

When researching a stock for investment, what can tell us that the company is in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after we looked into Zhejiang Huace Film & TV (SZSE:300133), the trends above didn't look too great.

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. The formula for this calculation on Zhejiang Huace Film & TV is:

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

0.016 = CN¥119m ÷ (CN¥10b - CN¥2.6b) (Based on the trailing twelve months to March 2024).

So, Zhejiang Huace Film & TV has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Entertainment industry average of 5.2%.

See our latest analysis for Zhejiang Huace Film & TV

Above you can see how the current ROCE for Zhejiang Huace Film & TV compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Zhejiang Huace Film & TV .

The Trend Of ROCE

We are a bit worried about the trend of returns on capital at Zhejiang Huace Film & TV. About five years ago, returns on capital were 5.9%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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 Huace Film & TV becoming one if things continue as they have.

On a side note, Zhejiang Huace Film & TV has done well to pay down its current liabilities to 26% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line

In summary, it's unfortunate that Zhejiang Huace Film & TV is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 24% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with Zhejiang Huace Film & TV (including 1 which doesn't sit too well with us) .

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.