TianJin 712 Communication & Broadcasting's (SHSE:603712) Returns On Capital Not Reflecting Well On The Business

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at TianJin 712 Communication & Broadcasting (SHSE:603712) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for TianJin 712 Communication & Broadcasting:

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

0.037 = CN¥214m ÷ (CN¥9.3b - CN¥3.5b) (Based on the trailing twelve months to June 2024).

So, TianJin 712 Communication & Broadcasting has an ROCE of 3.7%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.4%.

View our latest analysis for TianJin 712 Communication & Broadcasting

In the above chart we have measured TianJin 712 Communication & Broadcasting's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for TianJin 712 Communication & Broadcasting .

So How Is TianJin 712 Communication & Broadcasting's ROCE Trending?

When we looked at the ROCE trend at TianJin 712 Communication & Broadcasting, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 3.7% from 7.5% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, TianJin 712 Communication & Broadcasting has done well to pay down its current liabilities to 38% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From TianJin 712 Communication & Broadcasting's ROCE

In summary, we're somewhat concerned by TianJin 712 Communication & Broadcasting's diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 18% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a final note, we've found 2 warning signs for TianJin 712 Communication & Broadcasting that we think you should be aware of.

While TianJin 712 Communication & Broadcasting 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.