When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. On that note, looking into Xiwang FoodstuffsLtd (SZSE:000639), we weren't too upbeat about how things were going.

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 Xiwang FoodstuffsLtd:

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

0.055 = CN¥252m ÷ (CN¥7.0b - CN¥2.4b) (Based on the trailing twelve months to June 2024).

Therefore, Xiwang FoodstuffsLtd has an ROCE of 5.5%. Ultimately, that's a low return and it under-performs the Food industry average of 7.3%.

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

So How Is Xiwang FoodstuffsLtd's ROCE Trending?

In terms of Xiwang FoodstuffsLtd's historical ROCE trend, it isn't fantastic. Unfortunately, returns have declined substantially over the last five years to the 5.5% we see today. In addition to that, Xiwang FoodstuffsLtd is now employing 41% less capital than it was five years ago. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. If these underlying trends continue, we wouldn't be too optimistic going forward.

The Bottom Line

To see Xiwang FoodstuffsLtd reducing the capital employed in the business in tandem with diminishing returns, is concerning. Long term shareholders who've owned the stock over the last five years have experienced a 32% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Xiwang FoodstuffsLtd does have some risks, we noticed 2 warning signs (and 1 which is concerning) we think you should 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.

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.