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. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. And from a first read, things don't look too good at Hebei Yangyuan ZhiHui Beverage (SHSE:603156), so let's see why.
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. To calculate this metric for Hebei Yangyuan ZhiHui Beverage, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = CN¥1.9b ÷ (CN¥13b - CN¥2.5b) (Based on the trailing twelve months to September 2023).
Thus, Hebei Yangyuan ZhiHui Beverage has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 7.4% it's much better.
See our latest analysis for Hebei Yangyuan ZhiHui Beverage
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'd like to look at how Hebei Yangyuan ZhiHui Beverage has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Hebei Yangyuan ZhiHui Beverage Tell Us?
In terms of Hebei Yangyuan ZhiHui Beverage's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 25% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Hebei Yangyuan ZhiHui Beverage to turn into a multi-bagger.
What We Can Learn From Hebei Yangyuan ZhiHui Beverage's ROCE
In summary, it's unfortunate that Hebei Yangyuan ZhiHui Beverage is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 31% in the last five years. 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 Hebei Yangyuan ZhiHui Beverage you'll probably want to know about.
While Hebei Yangyuan ZhiHui Beverage 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.
