Hebei Yangyuan ZhiHui Beverage (SHSE:603156) Is Finding It Tricky To Allocate Its 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 reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after glancing at the trends within Hebei Yangyuan ZhiHui Beverage (SHSE:603156), we weren't too hopeful.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for Hebei Yangyuan ZhiHui Beverage, this is the formula:

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

0.17 = CN¥2.0b ÷ (CN¥15b - CN¥2.9b) (Based on the trailing twelve months to March 2024).

Therefore, Hebei Yangyuan ZhiHui Beverage has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 7.6% generated by the Food industry.

Check out our latest analysis for Hebei Yangyuan ZhiHui Beverage

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

How Are Returns Trending?

In terms of Hebei Yangyuan ZhiHui Beverage's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 21%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Hebei Yangyuan ZhiHui Beverage becoming one if things continue as they have.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 20%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

What We Can Learn From Hebei Yangyuan ZhiHui Beverage's ROCE

In summary, it's unfortunate that Hebei Yangyuan ZhiHui Beverage is generating lower returns from the same amount of capital. In spite of that, the stock has delivered a 1.6% 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.

Hebei Yangyuan ZhiHui Beverage does have some risks though, and we've spotted 2 warning signs for Hebei Yangyuan ZhiHui Beverage that you might be interested in.

While Hebei Yangyuan ZhiHui Beverage isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com