Tianjin Guifaxiang 18th Street Mahua FoodLtd (SZSE:002820) Could Be At Risk Of Shrinking As A Company

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. And from a first read, things don't look too good at Tianjin Guifaxiang 18th Street Mahua FoodLtd (SZSE:002820), so let's see why.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Tianjin Guifaxiang 18th Street Mahua FoodLtd is:

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

0.028 = CN¥27m ÷ (CN¥1.0b - CN¥56m) (Based on the trailing twelve months to September 2024).

So, Tianjin Guifaxiang 18th Street Mahua FoodLtd has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Food industry average of 6.8%.

View our latest analysis for Tianjin Guifaxiang 18th Street Mahua FoodLtd

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 Tianjin Guifaxiang 18th Street Mahua FoodLtd's past further, check out this free graph covering Tianjin Guifaxiang 18th Street Mahua FoodLtd's past earnings, revenue and cash flow.

What Can We Tell From Tianjin Guifaxiang 18th Street Mahua FoodLtd's ROCE Trend?

We are a bit worried about the trend of returns on capital at Tianjin Guifaxiang 18th Street Mahua FoodLtd. To be more specific, the ROCE was 7.4% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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 Tianjin Guifaxiang 18th Street Mahua FoodLtd becoming one if things continue as they have.

In Conclusion...

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. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you'd like to know about the risks facing Tianjin Guifaxiang 18th Street Mahua FoodLtd, we've discovered 2 warning signs that you should be aware of.

While Tianjin Guifaxiang 18th Street Mahua FoodLtd 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.