Investors Could Be Concerned With Funshine Culture GroupLtd's (SZSE:300860) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Funshine Culture GroupLtd (SZSE:300860) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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 Funshine Culture GroupLtd:

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

0.02 = CN¥64m ÷ (CN¥3.6b - CN¥407m) (Based on the trailing twelve months to September 2024).

Therefore, Funshine Culture GroupLtd has an ROCE of 2.0%. Ultimately, that's a low return and it under-performs the Entertainment industry average of 5.3%.

Check out our latest analysis for Funshine Culture GroupLtd

Above you can see how the current ROCE for Funshine Culture GroupLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Funshine Culture GroupLtd for free.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Funshine Culture GroupLtd doesn't inspire confidence. Around five years ago the returns on capital were 51%, but since then they've fallen to 2.0%. 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. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Funshine Culture GroupLtd has decreased its current liabilities to 11% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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.

Our Take On Funshine Culture GroupLtd's ROCE

While returns have fallen for Funshine Culture GroupLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 54% over the last three years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Funshine Culture GroupLtd does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is significant...

While Funshine Culture GroupLtd 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.