The Return Trends At Lizhi (NASDAQ:LIZI) Look Promising
What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Lizhi (NASDAQ:LIZI) and its trend of ROCE, we really liked what we saw.
What Is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Lizhi, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.037 = CN¥16m ÷ (CN¥701m - CN¥274m) (Based on the trailing twelve months to September 2023).
Therefore, Lizhi has an ROCE of 3.7%. In absolute terms, that's a low return and it also under-performs the Entertainment industry average of 8.8%.
View our latest analysis for Lizhi
Historical performance is a great place to start when researching a stock so above you can see the gauge for Lizhi's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Lizhi, check out these free graphs here.
What Can We Tell From Lizhi's ROCE Trend?
We're delighted to see that Lizhi is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 3.7% on its capital. In addition to that, Lizhi is employing 417% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
One more thing to note, Lizhi has decreased current liabilities to 39% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.
Our Take On Lizhi's ROCE
Long story short, we're delighted to see that Lizhi's reinvestment activities have paid off and the company is now profitable. And since the stock has dived 94% over the last three years, there may be other factors affecting the company's prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.
If you'd like to know about the risks facing Lizhi, we've discovered 3 warning signs that 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.
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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.
