Here's What's Concerning About Zhejiang Jinke Tom Culture Industry's (SZSE:300459) Returns On Capital

What underlying fundamental trends can indicate that a company might be in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining 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. In light of that, from a first glance at Zhejiang Jinke Tom Culture Industry (SZSE:300459), we've spotted some signs that it could be struggling, so let's investigate.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Zhejiang Jinke Tom Culture Industry:

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

0.058 = CN¥225m ÷ (CN¥5.4b - CN¥1.5b) (Based on the trailing twelve months to September 2024).

So, Zhejiang Jinke Tom Culture Industry has an ROCE of 5.8%. On its own, that's a low figure but it's around the 5.3% average generated by the Entertainment industry.

See our latest analysis for Zhejiang Jinke Tom Culture Industry

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'd like to look at how Zhejiang Jinke Tom Culture Industry has performed in the past in other metrics, you can view this free graph of Zhejiang Jinke Tom Culture Industry's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of Zhejiang Jinke Tom Culture Industry's historical ROCE trend, it isn't fantastic. To be more specific, today's ROCE was 9.7% five years ago but has since fallen to 5.8%. On top of that, the business is utilizing 59% less capital within its operations. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. 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.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 28%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 5.8%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

The Bottom Line

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. Despite the concerning underlying trends, the stock has actually gained 30% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Like most companies, Zhejiang Jinke Tom Culture Industry 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.