What financial metrics can indicate to us that a company is maturing or even in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. In light of that, from a first glance at Zhewen Interactive Group (SHSE:600986), we've spotted some signs that it could be struggling, so let's investigate.
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. To calculate this metric for Zhewen Interactive Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.022 = CN¥110m ÷ (CN¥8.3b - CN¥3.3b) (Based on the trailing twelve months to September 2023).
Therefore, Zhewen Interactive Group has an ROCE of 2.2%. Ultimately, that's a low return and it under-performs the Media industry average of 4.9%.
See our latest analysis for Zhewen Interactive Group
In the above chart we have measured Zhewen Interactive Group's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Does the ROCE Trend For Zhewen Interactive Group Tell Us?
We aren't too thrilled by the trend because ROCE has declined 74% over the last five years and despite the capital raising conducted before the latest reports, the business has -25% less capital employed.
What We Can Learn From Zhewen Interactive Group's ROCE
To see Zhewen Interactive Group reducing the capital employed in the business in tandem with diminishing returns, is concerning. Investors must expect better things on the horizon though because the stock has risen 31% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.
Zhewen Interactive Group does have some risks though, and we've spotted 2 warning signs for Zhewen Interactive Group that you might be interested in.
While Zhewen Interactive Group 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.