Sichuan Joyou Digital TechnologiesLtd (SZSE:301172) Will Want To Turn Around Its Return Trends

If you're looking for a multi-bagger, there's a few things to keep an eye out 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Sichuan Joyou Digital TechnologiesLtd (SZSE:301172) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on Sichuan Joyou Digital TechnologiesLtd is:

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

0.028 = CN¥41m ÷ (CN¥1.7b - CN¥297m) (Based on the trailing twelve months to June 2024).

Therefore, Sichuan Joyou Digital TechnologiesLtd has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the IT industry average of 3.8%.

See our latest analysis for Sichuan Joyou Digital TechnologiesLtd

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're interested in investigating Sichuan Joyou Digital TechnologiesLtd's past further, check out this free graph covering Sichuan Joyou Digital TechnologiesLtd's past earnings, revenue and cash flow.

What Can We Tell From Sichuan Joyou Digital TechnologiesLtd's ROCE Trend?

When we looked at the ROCE trend at Sichuan Joyou Digital TechnologiesLtd, we didn't gain much confidence. Around five years ago the returns on capital were 29%, but since then they've fallen to 2.8%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Sichuan Joyou Digital TechnologiesLtd has decreased its current liabilities to 17% of total assets. That could partly explain why the ROCE has dropped. 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 Key Takeaway

To conclude, we've found that Sichuan Joyou Digital TechnologiesLtd is reinvesting in the business, but returns have been falling. And in the last year, the stock has given away 28% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Sichuan Joyou Digital TechnologiesLtd has the makings of a multi-bagger.

If you want to continue researching Sichuan Joyou Digital TechnologiesLtd, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Sichuan Joyou Digital TechnologiesLtd 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.