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. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. In light of that, from a first glance at Gansu Huangtai Wine-Marketing IndustryLtd (SZSE:000995), we've spotted some signs that it could be struggling, so let's investigate.

Understanding 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. The formula for this calculation on Gansu Huangtai Wine-Marketing IndustryLtd is:

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

0.002 = CN¥385k ÷ (CN¥486m - CN¥290m) (Based on the trailing twelve months to September 2024).

Therefore, Gansu Huangtai Wine-Marketing IndustryLtd has an ROCE of 0.2%. Ultimately, that's a low return and it under-performs the Beverage industry average of 18%.

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're interested in investigating Gansu Huangtai Wine-Marketing IndustryLtd's past further, check out this free graph covering Gansu Huangtai Wine-Marketing IndustryLtd's past earnings, revenue and cash flow.

What Can We Tell From Gansu Huangtai Wine-Marketing IndustryLtd's ROCE Trend?

We are a bit worried about the trend of returns on capital at Gansu Huangtai Wine-Marketing IndustryLtd. About four years ago, returns on capital were 25%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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 Gansu Huangtai Wine-Marketing IndustryLtd to turn into a multi-bagger.

On a separate but related note, it's important to know that Gansu Huangtai Wine-Marketing IndustryLtd has a current liabilities to total assets ratio of 60%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Long term shareholders who've owned the stock over the last three years have experienced a 32% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a final note, we've found 3 warning signs for Gansu Huangtai Wine-Marketing IndustryLtd 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.

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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.