Returns On Capital At Guangzhou Lingnan Group Holdings (SZSE:000524) Paint A Concerning Picture

What underlying fundamental trends can indicate that a company might be in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. So after we looked into Guangzhou Lingnan Group Holdings (SZSE:000524), the trends above didn't look too great.

Understanding 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. The formula for this calculation on Guangzhou Lingnan Group Holdings is:

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

0.041 = CN¥96m ÷ (CN¥3.6b - CN¥1.3b) (Based on the trailing twelve months to June 2024).

Thus, Guangzhou Lingnan Group Holdings has an ROCE of 4.1%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 11%.

View our latest analysis for Guangzhou Lingnan Group Holdings

Above you can see how the current ROCE for Guangzhou Lingnan Group Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Guangzhou Lingnan Group Holdings for free.

The Trend Of ROCE

In terms of Guangzhou Lingnan Group Holdings' historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 9.3% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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 Guangzhou Lingnan Group Holdings becoming one if things continue as they have.

What We Can Learn From Guangzhou Lingnan Group Holdings' ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Despite the concerning underlying trends, the stock has actually gained 40% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Guangzhou Lingnan Group Holdings could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 000524 on our platform quite valuable.

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.