Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. 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. On that note, looking into Shanghai Jin Jiang International Hotels (SHSE:900934), we weren't too upbeat about how things were going.

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 Shanghai Jin Jiang International Hotels:

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

0.014 = CN¥490m ÷ (CN¥47b - CN¥12b) (Based on the trailing twelve months to December 2022).

So, Shanghai Jin Jiang International Hotels has an ROCE of 1.4%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 3.9%.

Check out our latest analysis for Shanghai Jin Jiang International Hotels

In the above chart we have measured Shanghai Jin Jiang International Hotels' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Shanghai Jin Jiang International Hotels' ROCE Trend?

In terms of Shanghai Jin Jiang International Hotels' historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 3.9% that they were earning five years ago. 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 Shanghai Jin Jiang International Hotels becoming one if things continue as they have.

What We Can Learn From Shanghai Jin Jiang International Hotels' ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Shanghai Jin Jiang International Hotels does have some risks, we noticed 2 warning signs (and 1 which is a bit concerning) we think you should know about.

While Shanghai Jin Jiang International Hotels 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.