There Are Reasons To Feel Uneasy About GUOMAI Culture & Media's (SZSE:301052) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at GUOMAI Culture & Media (SZSE:301052), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on GUOMAI Culture & Media is:

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

0.043 = CN¥30m ÷ (CN¥825m - CN¥135m) (Based on the trailing twelve months to June 2024).

Thus, GUOMAI Culture & Media has an ROCE of 4.3%. Even though it's in line with the industry average of 4.1%, it's still a low return by itself.

View our latest analysis for GUOMAI Culture & Media

Historical performance is a great place to start when researching a stock so above you can see the gauge for GUOMAI Culture & Media's ROCE against it's prior returns. If you'd like to look at how GUOMAI Culture & Media has performed in the past in other metrics, you can view this free graph of GUOMAI Culture & Media's past earnings, revenue and cash flow.

How Are Returns Trending?

When we looked at the ROCE trend at GUOMAI Culture & Media, we didn't gain much confidence. To be more specific, ROCE has fallen from 14% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From GUOMAI Culture & Media's ROCE

Bringing it all together, while we're somewhat encouraged by GUOMAI Culture & Media's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 57% over the last three years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One more thing: We've identified 3 warning signs with GUOMAI Culture & Media (at least 1 which is a bit unpleasant) , and understanding them would certainly be useful.

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.