If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. In light of that, from a first glance at Xinhuanet (SHSE:603888), we've spotted some signs that it could be struggling, so let's investigate.

Return On Capital Employed (ROCE): What Is It?

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 Xinhuanet, this is the formula:

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

0.029 = CN¥112m ÷ (CN¥4.9b - CN¥1b) (Based on the trailing twelve months to March 2024).

Thus, Xinhuanet has an ROCE of 2.9%. In absolute terms, that's a low return and it also under-performs the Media industry average of 4.0%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Xinhuanet's ROCE against it's prior returns. If you're interested in investigating Xinhuanet's past further, check out this free graph covering Xinhuanet's past earnings, revenue and cash flow.

What Does the ROCE Trend For Xinhuanet Tell Us?

There is reason to be cautious about Xinhuanet, given the returns are trending downwards. About five years ago, returns on capital were 5.2%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Xinhuanet becoming one if things continue as they have.

Our Take On Xinhuanet's ROCE

In summary, it's unfortunate that Xinhuanet is generating lower returns from the same amount of capital. Despite the concerning underlying trends, the stock has actually gained 22% 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.

Xinhuanet does have some risks though, and we've spotted 1 warning sign for Xinhuanet that you might be interested in.

While Xinhuanet 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com