Jiu Zun Digital Interactive Entertainment Group Holdings (HKG:1961) Is Reinvesting At Lower Rates Of Return

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Jiu Zun Digital Interactive Entertainment Group Holdings (HKG:1961), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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. To calculate this metric for Jiu Zun Digital Interactive Entertainment Group Holdings, this is the formula:

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

0.09 = CN¥21m ÷ (CN¥255m - CN¥27m) (Based on the trailing twelve months to December 2020).

So, Jiu Zun Digital Interactive Entertainment Group Holdings has an ROCE of 9.0%. In absolute terms, that's a low return and it also under-performs the Entertainment industry average of 15%.

View our latest analysis for Jiu Zun Digital Interactive Entertainment Group Holdings

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

How Are Returns Trending?

On the surface, the trend of ROCE at Jiu Zun Digital Interactive Entertainment Group Holdings doesn't inspire confidence. To be more specific, ROCE has fallen from 44% over the last four years. And considering revenue has dropped while employing more capital, we'd be cautious. 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, Jiu Zun Digital Interactive Entertainment Group Holdings has done well to pay down its current liabilities to 10% of total assets. That could partly explain why the ROCE has dropped. 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Jiu Zun Digital Interactive Entertainment Group Holdings' ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Jiu Zun Digital Interactive Entertainment Group Holdings have fallen, meanwhile the business is employing more capital than it was four years ago. Long term shareholders who've owned the stock over the last year have experienced a 39% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a final note, we found 3 warning signs for Jiu Zun Digital Interactive Entertainment Group Holdings (1 is a bit unpleasant) you should be aware of.

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