These Return Metrics Don't Make Inner Mongolia Baotou Steel Union (SHSE:600010) Look Too Strong

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base 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. So after glancing at the trends within Inner Mongolia Baotou Steel Union (SHSE:600010), we weren't too hopeful.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Inner Mongolia Baotou Steel Union:

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%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 6.8%.

View our latest analysis for Inner Mongolia Baotou Steel Union

In the above chart we have measured Inner Mongolia Baotou Steel Union's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Inner Mongolia Baotou Steel Union for free.

So How Is Inner Mongolia Baotou Steel Union's ROCE Trending?

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. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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. If these trends continue, we wouldn't expect Inner Mongolia Baotou Steel Union to turn into a multi-bagger.

Another thing to note, Inner Mongolia Baotou Steel Union has a high ratio of current liabilities to total assets of 44%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. However the stock has delivered a 53% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Like most companies, Inner Mongolia Baotou Steel Union does come with some risks, and we've found 1 warning sign that you should be aware of.

While Inner Mongolia Baotou Steel Union 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.