Guangdong Jialong Food's (SZSE:002495) Returns On Capital Tell Us There Is Reason To Feel Uneasy

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. 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 indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. On that note, looking into Guangdong Jialong Food (SZSE:002495), we weren't too upbeat about how things were going.

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. The formula for this calculation on Guangdong Jialong Food is:

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

0.007 = CN¥7.8m ÷ (CN¥1.2b - CN¥44m) (Based on the trailing twelve months to September 2024).

Therefore, Guangdong Jialong Food has an ROCE of 0.7%. Ultimately, that's a low return and it under-performs the Food industry average of 6.8%.

Check out our latest analysis for Guangdong Jialong Food

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're interested in investigating Guangdong Jialong Food's past further, check out this free graph covering Guangdong Jialong Food's past earnings, revenue and cash flow.

What Can We Tell From Guangdong Jialong Food's ROCE Trend?

In terms of Guangdong Jialong Food's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 2.3%, 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. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Guangdong Jialong Food becoming one if things continue as they have.

Our Take On Guangdong Jialong Food's ROCE

In summary, it's unfortunate that Guangdong Jialong Food is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 12% over the last five 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 1 warning sign for Guangdong Jialong Food 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.