Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. Having said that, after a brief look, Zhejiang Jinke Tom Culture Industry (SZSE:300459) we aren't filled with optimism, but let's investigate further.

What Is 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 Zhejiang Jinke Tom Culture Industry, this is the formula:

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

0.069 = CN¥246m ÷ (CN¥5.2b - CN¥1.6b) (Based on the trailing twelve months to June 2024).

So, Zhejiang Jinke Tom Culture Industry has an ROCE of 6.9%. In absolute terms, that's a low return, but it's much better than the Entertainment industry average of 5.4%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zhejiang Jinke Tom Culture Industry's ROCE against it's prior returns. If you're interested in investigating Zhejiang Jinke Tom Culture Industry's past further, check out this free graph covering Zhejiang Jinke Tom Culture Industry's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

The trend of ROCE doesn't look fantastic because it's fallen from 10% five years ago and the business is utilizing 62% less capital, even after their capital raise (conducted prior to the latest reporting period).

On a side note, Zhejiang Jinke Tom Culture Industry's current liabilities have increased over the last five years to 31% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 6.9%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

The Bottom Line On Zhejiang Jinke Tom Culture Industry's ROCE

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. Yet despite these concerning fundamentals, the stock has performed strongly with a 76% return over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you're still interested in Zhejiang Jinke Tom Culture Industry it's worth checking out our FREE intrinsic value approximation for 300459 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.