Xinjiang Yilite IndustryLtd (SHSE:600197) Could Be Struggling To Allocate 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. Basically the company is earning less on its investments and it is also reducing its total assets. So after glancing at the trends within Xinjiang Yilite IndustryLtd (SHSE:600197), we weren't too hopeful.

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. The formula for this calculation on Xinjiang Yilite IndustryLtd is:

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

0.11 = CN¥458m ÷ (CN¥5.1b - CN¥931m) (Based on the trailing twelve months to September 2024).

Therefore, Xinjiang Yilite IndustryLtd has an ROCE of 11%. In absolute terms, that's a pretty standard return but compared to the Beverage industry average it falls behind.

Check out our latest analysis for Xinjiang Yilite IndustryLtd

In the above chart we have measured Xinjiang Yilite IndustryLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Xinjiang Yilite IndustryLtd .

What Does the ROCE Trend For Xinjiang Yilite IndustryLtd Tell Us?

We are a bit worried about the trend of returns on capital at Xinjiang Yilite IndustryLtd. Unfortunately the returns on capital have diminished from the 15% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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 Xinjiang Yilite IndustryLtd to turn into a multi-bagger.

The Bottom Line On Xinjiang Yilite IndustryLtd's ROCE

In summary, it's unfortunate that Xinjiang Yilite IndustryLtd is generating lower returns from the same amount of capital. In spite of that, the stock has delivered a 33% 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.

On a final note, we've found 1 warning sign for Xinjiang Yilite IndustryLtd that we think you should be aware of.

While Xinjiang Yilite IndustryLtd 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.