Jiangsu Yanghe Distillery's (SZSE:002304) Returns On Capital Not Reflecting Well On The Business

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Jiangsu Yanghe Distillery (SZSE:002304) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 Jiangsu Yanghe Distillery, this is the formula:

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

0.18 = CN¥10.0b ÷ (CN¥64b - CN¥10.0b) (Based on the trailing twelve months to September 2024).

Therefore, Jiangsu Yanghe Distillery has an ROCE of 18%. By itself that's a normal return on capital and it's in line with the industry's average returns of 18%.

See our latest analysis for Jiangsu Yanghe Distillery

In the above chart we have measured Jiangsu Yanghe Distillery's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Jiangsu Yanghe Distillery .

How Are Returns Trending?

On the surface, the trend of ROCE at Jiangsu Yanghe Distillery doesn't inspire confidence. Over the last five years, returns on capital have decreased to 18% from 27% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

What We Can Learn From Jiangsu Yanghe Distillery's ROCE

We're a bit apprehensive about Jiangsu Yanghe Distillery because despite more capital being deployed in the business, returns on that capital and sales have both fallen. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you'd like to know about the risks facing Jiangsu Yanghe Distillery, we've discovered 1 warning sign that you should be aware of.

While Jiangsu Yanghe Distillery 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.