If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? 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. So after we looked into Huangshan Tourism DevelopmentLtd (SHSE:600054), the trends above didn't look too great.

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. Analysts use this formula to calculate it for Huangshan Tourism DevelopmentLtd:

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

0.082 = CN¥422m ÷ (CN¥5.7b - CN¥551m) (Based on the trailing twelve months to September 2023).

Therefore, Huangshan Tourism DevelopmentLtd has an ROCE of 8.2%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.4%.

View our latest analysis for Huangshan Tourism DevelopmentLtd

In the above chart we have measured Huangshan Tourism DevelopmentLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Huangshan Tourism DevelopmentLtd.

What The Trend Of ROCE Can Tell Us

We are a bit worried about the trend of returns on capital at Huangshan Tourism DevelopmentLtd. About five years ago, returns on capital were 11%, 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 Huangshan Tourism DevelopmentLtd becoming one if things continue as they have.

The Key Takeaway

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. Investors must expect better things on the horizon though because the stock has risen 18% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Huangshan Tourism DevelopmentLtd could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

While Huangshan Tourism DevelopmentLtd 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.