Some Investors May Be Worried About Beijing Shunxin AgricultureLtd's (SZSE:000860) Returns On Capital

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after we looked into Beijing Shunxin AgricultureLtd (SZSE:000860), the trends above didn't look too great.

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. Analysts use this formula to calculate it for Beijing Shunxin AgricultureLtd:

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

0.041 = CN¥367m ÷ (CN¥13b - CN¥4.5b) (Based on the trailing twelve months to June 2024).

Thus, Beijing Shunxin AgricultureLtd has an ROCE of 4.1%. Ultimately, that's a low return and it under-performs the Beverage industry average of 17%.

View our latest analysis for Beijing Shunxin AgricultureLtd

In the above chart we have measured Beijing Shunxin AgricultureLtd's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Beijing Shunxin AgricultureLtd .

What Does the ROCE Trend For Beijing Shunxin AgricultureLtd Tell Us?

There is reason to be cautious about Beijing Shunxin AgricultureLtd, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 15% that they were earning five years ago. 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. If these trends continue, we wouldn't expect Beijing Shunxin AgricultureLtd to turn into a multi-bagger.

On a related note, Beijing Shunxin AgricultureLtd has decreased its current liabilities to 34% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors haven't taken kindly to these developments, since the stock has declined 65% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you're still interested in Beijing Shunxin AgricultureLtd it's worth checking out our FREE intrinsic value approximation for 000860 to see if it's trading at an attractive price in other respects.

While Beijing Shunxin AgricultureLtd 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.