Yantai Changyu Pioneer Wine (SZSE:000869) Is Finding It Tricky To Allocate Its 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 Yantai Changyu Pioneer Wine (SZSE:000869), we weren't too hopeful.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Yantai Changyu Pioneer Wine is:

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

0.036 = CN¥390m ÷ (CN¥12b - CN¥1.5b) (Based on the trailing twelve months to September 2024).

Therefore, Yantai Changyu Pioneer Wine has an ROCE of 3.6%. In absolute terms, that's a low return and it also under-performs the Beverage industry average of 18%.

Check out our latest analysis for Yantai Changyu Pioneer Wine

Above you can see how the current ROCE for Yantai Changyu Pioneer Wine 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 Yantai Changyu Pioneer Wine for free.

So How Is Yantai Changyu Pioneer Wine's ROCE Trending?

In terms of Yantai Changyu Pioneer Wine's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 12% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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 Yantai Changyu Pioneer Wine to turn into a multi-bagger.

The Bottom Line On Yantai Changyu Pioneer Wine's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Yantai Changyu Pioneer Wine does have some risks though, and we've spotted 2 warning signs for Yantai Changyu Pioneer Wine that you might be interested in.

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.