Returns On Capital Signal Difficult Times Ahead For Shandong Gold PhoenixLtd (SHSE:603586)

When researching a stock for investment, what can tell us that the company is in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. 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 Shandong Gold PhoenixLtd (SHSE:603586), we weren't too hopeful.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Shandong Gold PhoenixLtd, this is the formula:

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

0.051 = CN¥117m ÷ (CN¥2.6b - CN¥323m) (Based on the trailing twelve months to June 2024).

So, Shandong Gold PhoenixLtd has an ROCE of 5.1%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 7.2%.

View our latest analysis for Shandong Gold PhoenixLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shandong Gold PhoenixLtd's ROCE against it's prior returns. If you'd like to look at how Shandong Gold PhoenixLtd has performed in the past in other metrics, you can view this free graph of Shandong Gold PhoenixLtd's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

There is reason to be cautious about Shandong Gold PhoenixLtd, given the returns are trending downwards. To be more specific, the ROCE was 7.1% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Shandong Gold PhoenixLtd becoming one if things continue as they have.

What We Can Learn From Shandong Gold PhoenixLtd's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. It should come as no surprise then that the stock has fallen 13% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Shandong Gold PhoenixLtd does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those can't be ignored...

While Shandong Gold PhoenixLtd 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.