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. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. In light of that, from a first glance at Qingdao Citymedia Co (SHSE:600229), we've spotted some signs that it could be struggling, so let's investigate.

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. Analysts use this formula to calculate it for Qingdao Citymedia Co:

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

0.063 = CN¥206m ÷ (CN¥4.4b - CN¥1.2b) (Based on the trailing twelve months to September 2024).

Thus, Qingdao Citymedia Co has an ROCE of 6.3%. In absolute terms, that's a low return, but it's much better than the Media industry average of 5.2%.

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Qingdao Citymedia Co has performed in the past in other metrics, you can view this free graph of Qingdao Citymedia Co's past earnings, revenue and cash flow.

What Does the ROCE Trend For Qingdao Citymedia Co Tell Us?

We are a bit worried about the trend of returns on capital at Qingdao Citymedia Co. About five years ago, returns on capital were 9.9%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Qingdao Citymedia Co to turn into a multi-bagger.

In Conclusion...

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors must expect better things on the horizon though because the stock has risen 15% in 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.

Qingdao Citymedia Co does have some risks though, and we've spotted 2 warning signs for Qingdao Citymedia Co that you might be interested in.

While Qingdao Citymedia Co 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.