Xiamen Xindeco's (SZSE:000701) Returns On Capital Not Reflecting Well On The Business

What financial metrics can indicate to us that a company is maturing or even in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. And from a first read, things don't look too good at Xiamen Xindeco (SZSE:000701), so let's see why.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Xiamen Xindeco, this is the formula:

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

0.0035 = CN¥23m ÷ (CN¥20b - CN¥14b) (Based on the trailing twelve months to September 2023).

So, Xiamen Xindeco has an ROCE of 0.4%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 7.3%.

See our latest analysis for Xiamen Xindeco

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Xiamen Xindeco's past further, check out this free graph covering Xiamen Xindeco's past earnings, revenue and cash flow.

So How Is Xiamen Xindeco's ROCE Trending?

We are a bit worried about the trend of returns on capital at Xiamen Xindeco. About five years ago, returns on capital were 5.9%, 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. 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 Xiamen Xindeco to turn into a multi-bagger.

On a separate but related note, it's important to know that Xiamen Xindeco has a current liabilities to total assets ratio of 68%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Xiamen Xindeco's ROCE

In summary, it's unfortunate that Xiamen Xindeco is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 42% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing to note, we've identified 2 warning signs with Xiamen Xindeco and understanding them should be part of your investment process.

While Xiamen Xindeco 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.