When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. 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. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after glancing at the trends within Guilin Tourism (SZSE:000978), we weren't too hopeful.

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. Analysts use this formula to calculate it for Guilin Tourism:

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

0.002 = CN¥4.0m ÷ (CN¥2.3b - CN¥339m) (Based on the trailing twelve months to December 2023).

Therefore, Guilin Tourism has an ROCE of 0.2%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 8.4%.

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

What Can We Tell From Guilin Tourism's ROCE Trend?

There is reason to be cautious about Guilin Tourism, given the returns are trending downwards. To be more specific, the ROCE was 3.2% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Guilin Tourism becoming one if things continue as they have.

Our Take On Guilin Tourism's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. In spite of that, the stock has delivered a 16% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

On a final note, we found 2 warning signs for Guilin Tourism (1 is a bit unpleasant) you should be aware of.

While Guilin Tourism 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.