Lizhi's (NASDAQ:LIZI) Returns On Capital Are Heading Higher

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Lizhi (NASDAQ:LIZI) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Lizhi is:

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

0.18 = CN¥88m ÷ (CN¥765m - CN¥281m) (Based on the trailing twelve months to June 2023).

Thus, Lizhi has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Entertainment industry average of 10% it's much better.

View our latest analysis for Lizhi

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

What Does the ROCE Trend For Lizhi Tell Us?

Lizhi has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 18% on its capital. And unsurprisingly, like most companies trying to break into the black, Lizhi is utilizing 475% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a related note, the company's ratio of current liabilities to total assets has decreased to 37%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Lizhi has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

In Conclusion...

In summary, it's great to see that Lizhi has managed to break into profitability and is continuing to reinvest in its business. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 61% return over the last three years. In light of that, we think it's worth looking further into this stock because if Lizhi can keep these trends up, it could have a bright future ahead.

If you want to know some of the risks facing Lizhi we've found 2 warning signs (1 can't be ignored!) that you should be aware of before investing here.

While Lizhi isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.