Inner Mongolia Baotou Steel Union (SHSE:600010) Will Be Hoping To Turn Its Returns On Capital Around

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. Having said that, after a brief look, Inner Mongolia Baotou Steel Union (SHSE:600010) we aren't filled with optimism, but let's investigate further.

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Understanding 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. To calculate this metric for Inner Mongolia Baotou Steel Union, this is the formula:

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

0.015 = CN¥1.3b ÷ (CN¥153b - CN¥67b) (Based on the trailing twelve months to September 2024).

So, Inner Mongolia Baotou Steel Union has an ROCE of 1.5%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 7.0%.

View our latest analysis for Inner Mongolia Baotou Steel Union

Historical performance is a great place to start when researching a stock so above you can see the gauge for Inner Mongolia Baotou Steel Union's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Inner Mongolia Baotou Steel Union.

What Can We Tell From Inner Mongolia Baotou Steel Union's ROCE Trend?

In terms of Inner Mongolia Baotou Steel Union's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 6.4% five years ago, but since then it has dropped noticeably. 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 Inner Mongolia Baotou Steel Union becoming one if things continue as they have.

On a separate but related note, it's important to know that Inner Mongolia Baotou Steel Union has a current liabilities to total assets ratio of 44%, 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Inner Mongolia Baotou Steel Union's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 62% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

One more thing, we've spotted 2 warning signs facing Inner Mongolia Baotou Steel Union that you might find interesting.

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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.