When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. Having said that, after a brief look, Dinglong CultureLtd (SZSE:002502) we aren't filled with optimism, but let's investigate further.
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. The formula for this calculation on Dinglong CultureLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0061 = CN¥12m ÷ (CN¥2.3b - CN¥341m) (Based on the trailing twelve months to September 2023).
Therefore, Dinglong CultureLtd has an ROCE of 0.6%. Ultimately, that's a low return and it under-performs the Entertainment industry average of 4.1%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Dinglong CultureLtd's ROCE against it's prior returns. If you'd like to look at how Dinglong CultureLtd has performed in the past in other metrics, you can view this free graph of Dinglong CultureLtd's past earnings, revenue and cash flow.
The Trend Of ROCE
The trend of ROCE at Dinglong CultureLtd is showing some signs of weakness. The company used to generate 1.1% on its capital five years ago but it has since fallen noticeably. In addition to that, Dinglong CultureLtd is now employing 42% less capital than it was five years ago. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. If these underlying trends continue, we wouldn't be too optimistic going forward.
In Conclusion...
In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. Investors haven't taken kindly to these developments, since the stock has declined 62% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.
If you're still interested in Dinglong CultureLtd it's worth checking out our FREE intrinsic value approximation for 002502 to see if it's trading at an attractive price in other respects.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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.