Tianjin Binhai Energy & DevelopmentLtd (SZSE:000695) Will Be Looking To Turn Around Its Returns

When researching a stock for investment, what can tell us that the company is in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates the company is producing less profit from its investments and its total assets are decreasing. So after we looked into Tianjin Binhai Energy & DevelopmentLtd (SZSE:000695), 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. The formula for this calculation on Tianjin Binhai Energy & DevelopmentLtd is:

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

0.0034 = CN¥1.7m ÷ (CN¥1.3b - CN¥798m) (Based on the trailing twelve months to September 2024).

Therefore, Tianjin Binhai Energy & DevelopmentLtd has an ROCE of 0.3%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 5.3%.

View our latest analysis for Tianjin Binhai Energy & DevelopmentLtd

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'd like to look at how Tianjin Binhai Energy & DevelopmentLtd has performed in the past in other metrics, you can view this free graph of Tianjin Binhai Energy & DevelopmentLtd's past earnings, revenue and cash flow.

What Can We Tell From Tianjin Binhai Energy & DevelopmentLtd's ROCE Trend?

The trend of ROCE doesn't look fantastic because it's fallen from 7.7% five years ago and the business is utilizing 27% less capital, even after their capital raise (conducted prior to the latest reporting period).

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 62%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

The Bottom Line

In summary, it's unfortunate that Tianjin Binhai Energy & DevelopmentLtd is shrinking its capital base and also generating lower returns. However the stock has delivered a 42% return to shareholders over the last five years, so investors might be expecting the trends to turn around. 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: We've identified 3 warning signs with Tianjin Binhai Energy & DevelopmentLtd (at least 2 which are a bit unpleasant) , and understanding them would certainly be useful.

While Tianjin Binhai Energy & DevelopmentLtd 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.