These Return Metrics Don't Make Gansu Huangtai Wine-Marketing IndustryLtd (SZSE:000995) Look Too Strong

What underlying fundamental trends can indicate that a company might be in decline? 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. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after glancing at the trends within Gansu Huangtai Wine-Marketing IndustryLtd (SZSE:000995), we weren't too hopeful.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for Gansu Huangtai Wine-Marketing IndustryLtd, this is the formula:

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

0.002 = CN¥385k ÷ (CN¥486m - CN¥290m) (Based on the trailing twelve months to September 2024).

Thus, Gansu Huangtai Wine-Marketing IndustryLtd has an ROCE of 0.2%. In absolute terms, that's a low return and it also under-performs the Beverage industry average of 18%.

See our latest analysis for Gansu Huangtai Wine-Marketing IndustryLtd

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 Gansu Huangtai Wine-Marketing IndustryLtd.

So How Is Gansu Huangtai Wine-Marketing IndustryLtd's ROCE Trending?

In terms of Gansu Huangtai Wine-Marketing IndustryLtd's historical ROCE movements, the trend doesn't inspire confidence. About four years ago, returns on capital were 25%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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 Gansu Huangtai Wine-Marketing IndustryLtd becoming one if things continue as they have.

On a separate but related note, it's important to know that Gansu Huangtai Wine-Marketing IndustryLtd has a current liabilities to total assets ratio of 60%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. It should come as no surprise then that the stock has fallen 12% over the last three years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a separate note, we've found 3 warning signs for Gansu Huangtai Wine-Marketing IndustryLtd you'll probably want to know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.