What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Inmyshow Digital Technology(Group)Co.Ltd (SHSE:600556) and its ROCE trend, we weren't exactly thrilled.

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 Inmyshow Digital Technology(Group)Co.Ltd, this is the formula:

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

0.04 = CN¥153m ÷ (CN¥5.8b - CN¥1.9b) (Based on the trailing twelve months to September 2023).

Thus, Inmyshow Digital Technology(Group)Co.Ltd has an ROCE of 4.0%. In absolute terms, that's a low return but it's around the Media industry average of 4.9%.

View our latest analysis for Inmyshow Digital Technology(Group)Co.Ltd

In the above chart we have measured Inmyshow Digital Technology(Group)Co.Ltd'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 Inmyshow Digital Technology(Group)Co.Ltd.

So How Is Inmyshow Digital Technology(Group)Co.Ltd's ROCE Trending?

When we looked at the ROCE trend at Inmyshow Digital Technology(Group)Co.Ltd, we didn't gain much confidence. To be more specific, ROCE has fallen from 21% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 33%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. 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.

What We Can Learn From Inmyshow Digital Technology(Group)Co.Ltd's ROCE

To conclude, we've found that Inmyshow Digital Technology(Group)Co.Ltd is reinvesting in the business, but returns have been falling. And in the last three years, the stock has given away 59% so the market doesn't look too hopeful on these trends strengthening any time soon. 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.

On a final note, we've found 2 warning signs for Inmyshow Digital Technology(Group)Co.Ltd that we think you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.