Jilin Quanyangquan's (SHSE:600189) Returns On Capital Tell Us There Is Reason To Feel Uneasy

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. On that note, looking into Jilin Quanyangquan (SHSE:600189), we weren't too upbeat about how things were going.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for Jilin Quanyangquan, this is the formula:

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

0.017 = CN¥44m ÷ (CN¥4.9b - CN¥2.3b) (Based on the trailing twelve months to September 2023).

Therefore, Jilin Quanyangquan has an ROCE of 1.7%. In absolute terms, that's a low return and it also under-performs the Forestry industry average of 4.5%.

See our latest analysis for Jilin Quanyangquan

Historical performance is a great place to start when researching a stock so above you can see the gauge for Jilin Quanyangquan's ROCE against it's prior returns. If you're interested in investigating Jilin Quanyangquan's past further, check out this free graph covering Jilin Quanyangquan's past earnings, revenue and cash flow.

How Are Returns Trending?

The trend of ROCE at Jilin Quanyangquan is showing some signs of weakness. To be more specific, today's ROCE was 5.5% five years ago but has since fallen to 1.7%. What's equally concerning is that the amount of capital deployed in the business has shrunk by 37% over that same period. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. If these underlying trends continue, we wouldn't be too optimistic going forward.

Another thing to note, Jilin Quanyangquan has a high ratio of current liabilities to total assets of 48%. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Jilin Quanyangquan's ROCE

To see Jilin Quanyangquan reducing the capital employed in the business in tandem with diminishing returns, is concerning. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 54% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Jilin Quanyangquan does have some risks, we noticed 3 warning signs (and 1 which can't be ignored) we think you should know about.

While Jilin Quanyangquan 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.