Here's What's Concerning About Sichuan Langsha Holding's (SHSE:600137) Returns On Capital

When researching a stock for investment, what can tell us that the company is in decline? 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. And from a first read, things don't look too good at Sichuan Langsha Holding (SHSE:600137), so let's see why.

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

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 Sichuan Langsha Holding, this is the formula:

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

0.036 = CN¥19m ÷ (CN¥668m - CN¥141m) (Based on the trailing twelve months to June 2024).

Thus, Sichuan Langsha Holding has an ROCE of 3.6%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 6.1%.

See our latest analysis for Sichuan Langsha Holding

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

How Are Returns Trending?

There is reason to be cautious about Sichuan Langsha Holding, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 4.9% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Sichuan Langsha Holding to turn into a multi-bagger.

In Conclusion...

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. And long term shareholders have watched their investments stay flat over the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing to note, we've identified 1 warning sign with Sichuan Langsha Holding and understanding it should be part of your investment process.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.