Be Wary Of Beijing Shengtong Printing (SZSE:002599) And Its Returns On Capital

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. In light of that, from a first glance at Beijing Shengtong Printing (SZSE:002599), we've spotted some signs that it could be struggling, so let's investigate.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on Beijing Shengtong Printing is:

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

0.015 = CN¥22m ÷ (CN¥2.5b - CN¥1.0b) (Based on the trailing twelve months to June 2024).

Thus, Beijing Shengtong Printing has an ROCE of 1.5%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 5.6%.

View our latest analysis for Beijing Shengtong Printing

In the above chart we have measured Beijing Shengtong Printing's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Beijing Shengtong Printing for free.

How Are Returns Trending?

We are a bit worried about the trend of returns on capital at Beijing Shengtong Printing. About five years ago, returns on capital were 7.7%, 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. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Beijing Shengtong Printing becoming one if things continue as they have.

On a side note, Beijing Shengtong Printing's current liabilities have increased over the last five years to 41% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

In Conclusion...

In summary, it's unfortunate that Beijing Shengtong Printing is generating lower returns from the same amount of capital. In spite of that, the stock has delivered a 18% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

If you'd like to know about the risks facing Beijing Shengtong Printing, we've discovered 1 warning sign that you should be aware of.

While Beijing Shengtong Printing may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.