If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. 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 briefly looking over the numbers, we don't think Zhejiang Jinke Tom Culture Industry (SZSE:300459) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Understanding Return On Capital Employed (ROCE)
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. To calculate this metric for Zhejiang Jinke Tom Culture Industry, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.087 = CN¥402m ÷ (CN¥6.1b - CN¥1.4b) (Based on the trailing twelve months to September 2023).
So, Zhejiang Jinke Tom Culture Industry has an ROCE of 8.7%. In absolute terms, that's a low return, but it's much better than the Entertainment industry average of 3.8%.
In the above chart we have measured Zhejiang Jinke Tom Culture Industry'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 report for Zhejiang Jinke Tom Culture Industry.
The Trend Of ROCE
We're a bit concerned with the trends, because the business is applying 54% less capital than it was five years ago and returns on that capital have stayed flat. When a company effectively decreases its assets base, it's not usually a sign to be optimistic on that company. Not only that, but the low returns on this capital mentioned earlier would leave most investors unimpressed.
Our Take On Zhejiang Jinke Tom Culture Industry's ROCE
It's a shame to see that Zhejiang Jinke Tom Culture Industry is effectively shrinking in terms of its capital base. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.
One more thing, we've spotted 2 warning signs facing Zhejiang Jinke Tom Culture Industry that you might find interesting.
While Zhejiang Jinke Tom Culture Industry 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.