Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? 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. Basically the company is earning less on its investments and it is also reducing its total assets. So after we looked into Bestsun Energy (SHSE:600681), the trends above didn't look too great.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Bestsun Energy, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = CN¥666m ÷ (CN¥7.8b - CN¥2.5b) (Based on the trailing twelve months to March 2023).
So, Bestsun Energy has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 9.0% generated by the Gas Utilities industry.
View our latest analysis for Bestsun Energy
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 Bestsun Energy's past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Bestsun Energy Tell Us?
In terms of Bestsun Energy's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 25%, 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. 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 Bestsun Energy becoming one if things continue as they have.
The Bottom Line
In summary, it's unfortunate that Bestsun Energy is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last five years have experienced a 31% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
On a final note, we've found 2 warning signs for Bestsun Energy that we think you should be aware of.
While Bestsun Energy 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.
