If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. So after glancing at the trends within Zhejiang Yankon Group (SHSE:600261), 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. Analysts use this formula to calculate it for Zhejiang Yankon Group:

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

0.059 = CN¥216m ÷ (CN¥5.1b - CN¥1.5b) (Based on the trailing twelve months to June 2024).

Thus, Zhejiang Yankon Group has an ROCE of 5.9%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.9%.

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

So How Is Zhejiang Yankon Group's ROCE Trending?

We are a bit worried about the trend of returns on capital at Zhejiang Yankon Group. To be more specific, the ROCE was 13% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Zhejiang Yankon Group to turn into a multi-bagger.

In Conclusion...

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. It should come as no surprise then that the stock has fallen 10% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Zhejiang Yankon Group does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...

While Zhejiang Yankon Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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