If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? 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. Having said that, after a brief look, Guangzhou Lingnan Group Holdings (SZSE:000524) we aren't filled with optimism, but let's investigate further.

Understanding 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. Analysts use this formula to calculate it for Guangzhou Lingnan Group Holdings:

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

0.037 = CN¥84m ÷ (CN¥3.3b - CN¥1.1b) (Based on the trailing twelve months to December 2023).

So, Guangzhou Lingnan Group Holdings has an ROCE of 3.7%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 8.6%.

Above you can see how the current ROCE for Guangzhou Lingnan Group Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Guangzhou Lingnan Group Holdings .

What Can We Tell From Guangzhou Lingnan Group Holdings' ROCE Trend?

The trend of ROCE at Guangzhou Lingnan Group Holdings is showing some signs of weakness. To be more specific, today's ROCE was 8.2% five years ago but has since fallen to 3.7%. What's equally concerning is that the amount of capital deployed in the business has shrunk by 23% over that same period. The fact that both are shrinking is an indication that the business is going through some tough times. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

The Bottom Line

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. Despite the concerning underlying trends, the stock has actually gained 24% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Guangzhou Lingnan Group Holdings could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 000524 on our platform quite valuable.

While Guangzhou Lingnan Group Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.