When researching a stock for investment, what can tell us that the company is in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after glancing at the trends within Gansu Guofang Industry & Trade (Group) (SHSE:601086), we weren't too hopeful.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Gansu Guofang Industry & Trade (Group) is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.067 = CN¥132m ÷ (CN¥2.8b - CN¥778m) (Based on the trailing twelve months to September 2023).
Thus, Gansu Guofang Industry & Trade (Group) has an ROCE of 6.7%. On its own that's a low return, but compared to the average of 5.3% generated by the Multiline Retail industry, it's much better.
Check out our latest analysis for Gansu Guofang Industry & Trade (Group)
Historical performance is a great place to start when researching a stock so above you can see the gauge for Gansu Guofang Industry & Trade (Group)'s ROCE against it's prior returns. If you're interested in investigating Gansu Guofang Industry & Trade (Group)'s past further, check out this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
In terms of Gansu Guofang Industry & Trade (Group)'s historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 9.0% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Gansu Guofang Industry & Trade (Group) becoming one if things continue as they have.
The Bottom Line
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. Despite the concerning underlying trends, the stock has actually gained 9.2% 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.
On a separate note, we've found 2 warning signs for Gansu Guofang Industry & Trade (Group) you'll probably want to know about.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.
