These Return Metrics Don't Make Tianshui Zhongxing Bio-technologyLtd (SZSE:002772) Look Too Strong

What financial metrics can indicate to us that a company is maturing or even in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Basically the company is earning less on its investments and it is also reducing its total assets. So after we looked into Tianshui Zhongxing Bio-technologyLtd (SZSE:002772), the trends above didn't look too great.

Understanding 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 Tianshui Zhongxing Bio-technologyLtd, this is the formula:

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

0.003 = CN¥15m ÷ (CN¥6.2b - CN¥1.3b) (Based on the trailing twelve months to June 2024).

Therefore, Tianshui Zhongxing Bio-technologyLtd has an ROCE of 0.3%. In absolute terms, that's a low return and it also under-performs the Food industry average of 7.2%.

View our latest analysis for Tianshui Zhongxing Bio-technologyLtd

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 Tianshui Zhongxing Bio-technologyLtd's past further, check out this free graph covering Tianshui Zhongxing Bio-technologyLtd's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of Tianshui Zhongxing Bio-technologyLtd's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 2.8%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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 Tianshui Zhongxing Bio-technologyLtd becoming one if things continue as they have.

On a side note, Tianshui Zhongxing Bio-technologyLtd's current liabilities have increased over the last five years to 21% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 0.3%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

In Conclusion...

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors must expect better things on the horizon though because the stock has risen 15% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

If you want to continue researching Tianshui Zhongxing Bio-technologyLtd, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Tianshui Zhongxing Bio-technologyLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.