Guangdong Mingzhu GroupLtd (SHSE:600382) Is Finding It Tricky To Allocate Its Capital

When researching a stock for investment, what can tell us that the company is in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after we looked into Guangdong Mingzhu GroupLtd (SHSE:600382), the trends above didn't look too great.

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. Analysts use this formula to calculate it for Guangdong Mingzhu GroupLtd:

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

0.026 = CN¥79m ÷ (CN¥3.3b - CN¥310m) (Based on the trailing twelve months to September 2024).

So, Guangdong Mingzhu GroupLtd has an ROCE of 2.6%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 5.0%.

Check out our latest analysis for Guangdong Mingzhu GroupLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Guangdong Mingzhu GroupLtd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Guangdong Mingzhu GroupLtd.

The Trend Of ROCE

The trend of returns that Guangdong Mingzhu GroupLtd is generating are raising some concerns. To be more specific, today's ROCE was 13% five years ago but has since fallen to 2.6%. What's equally concerning is that the amount of capital deployed in the business has shrunk by 56% over that same period. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.

The Bottom Line

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. Yet despite these concerning fundamentals, the stock has performed strongly with a 42% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One more thing to note, we've identified 2 warning signs with Guangdong Mingzhu GroupLtd and understanding these should be part of your investment process.

While Guangdong Mingzhu GroupLtd 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.