Investors Could Be Concerned With Zhejiang Jinke Tom Culture Industry's (SZSE:300459) Returns On Capital

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after we looked into Zhejiang Jinke Tom Culture Industry (SZSE:300459), the trends above didn't look too great.

What Is 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. To calculate this metric for Zhejiang Jinke Tom Culture Industry, this is the formula:

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

0.069 = CN¥246m ÷ (CN¥5.2b - CN¥1.6b) (Based on the trailing twelve months to June 2024).

Therefore, Zhejiang Jinke Tom Culture Industry has an ROCE of 6.9%. In absolute terms, that's a low return, but it's much better than the Entertainment industry average of 5.4%.

Check out our latest analysis for Zhejiang Jinke Tom Culture Industry

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zhejiang Jinke Tom Culture Industry's ROCE against it's prior returns. If you're interested in investigating Zhejiang Jinke Tom Culture Industry's past further, check out this free graph covering Zhejiang Jinke Tom Culture Industry's past earnings, revenue and cash flow.

So How Is Zhejiang Jinke Tom Culture Industry's ROCE Trending?

The trend of ROCE doesn't look fantastic because it's fallen from 10% five years ago and the business is utilizing 62% less capital, even after their capital raise (conducted prior to the latest reporting period).

On a side note, Zhejiang Jinke Tom Culture Industry's current liabilities have increased over the last five years to 31% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 6.9%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

The Bottom Line

To see Zhejiang Jinke Tom Culture Industry reducing the capital employed in the business in tandem with diminishing returns, is concerning. Investors must expect better things on the horizon though because the stock has risen 25% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Zhejiang Jinke Tom Culture Industry could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 300459 on our platform quite valuable.

While Zhejiang Jinke Tom Culture Industry may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.