These Return Metrics Don't Make Yantai Changyu Pioneer Wine (SZSE:000869) Look Too Strong

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. Having said that, after a brief look, Yantai Changyu Pioneer Wine (SZSE:000869) we aren't filled with optimism, but let's investigate further.

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 Yantai Changyu Pioneer Wine, this is the formula:

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

0.061 = CN¥685m ÷ (CN¥13b - CN¥2.2b) (Based on the trailing twelve months to December 2023).

Thus, Yantai Changyu Pioneer Wine has an ROCE of 6.1%. In absolute terms, that's a low return and it also under-performs the Beverage industry average of 13%.

Check out our latest analysis for Yantai Changyu Pioneer Wine

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Yantai Changyu Pioneer Wine.

What Does the ROCE Trend For Yantai Changyu Pioneer Wine Tell Us?

We are a bit worried about the trend of returns on capital at Yantai Changyu Pioneer Wine. To be more specific, the ROCE was 13% five years ago, but since then it has dropped noticeably. 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 Yantai Changyu Pioneer Wine to turn into a multi-bagger.

What We Can Learn From Yantai Changyu Pioneer Wine's ROCE

In summary, it's unfortunate that Yantai Changyu Pioneer Wine is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 19% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you want to know some of the risks facing Yantai Changyu Pioneer Wine we've found 2 warning signs (1 is potentially serious!) that you should be aware of before investing here.

While Yantai Changyu Pioneer Wine 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.