When researching a stock for investment, what can tell us that the company is in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. On that note, looking into China Reform Culture Holdings (SHSE:600636), 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. The formula for this calculation on China Reform Culture Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.034 = CN¥89m ÷ (CN¥2.7b - CN¥84m) (Based on the trailing twelve months to June 2023).
Therefore, China Reform Culture Holdings has an ROCE of 3.4%. In absolute terms, that's a low return and it also under-performs the Consumer Services industry average of 8.6%.
See our latest analysis for China Reform Culture Holdings
Historical performance is a great place to start when researching a stock so above you can see the gauge for China Reform Culture Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of China Reform Culture Holdings, check out these free graphs here.
What The Trend Of ROCE Can Tell Us
There is reason to be cautious about China Reform Culture Holdings, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 5.3% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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 China Reform Culture Holdings becoming one if things continue as they have.
The Key Takeaway
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. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.
If you want to know some of the risks facing China Reform Culture Holdings we've found 2 warning signs (1 is potentially serious!) that you should be aware of before investing here.
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.