Xinjiang Youhao(Group)Co.Ltd's (SHSE:600778) Returns On Capital Not Reflecting Well On The Business

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. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after glancing at the trends within Xinjiang Youhao(Group)Co.Ltd (SHSE:600778), we weren't too hopeful.

Return On Capital Employed (ROCE): What Is It?

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 Xinjiang Youhao(Group)Co.Ltd is:

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

0.043 = CN¥50m ÷ (CN¥4.0b - CN¥2.8b) (Based on the trailing twelve months to March 2024).

Thus, Xinjiang Youhao(Group)Co.Ltd has an ROCE of 4.3%. On its own, that's a low figure but it's around the 4.6% average generated by the Multiline Retail industry.

Check out our latest analysis for Xinjiang Youhao(Group)Co.Ltd

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

How Are Returns Trending?

The trend of ROCE at Xinjiang Youhao(Group)Co.Ltd is showing some signs of weakness. To be more specific, today's ROCE was 9.1% five years ago but has since fallen to 4.3%. What's equally concerning is that the amount of capital deployed in the business has shrunk by 37% over that same period. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. If these underlying trends continue, we wouldn't be too optimistic going forward.

Another thing to note, Xinjiang Youhao(Group)Co.Ltd has a high ratio of current liabilities to total assets of 70%. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Xinjiang Youhao(Group)Co.Ltd's ROCE

To see Xinjiang Youhao(Group)Co.Ltd reducing the capital employed in the business in tandem with diminishing returns, is concerning. Investors haven't taken kindly to these developments, since the stock has declined 11% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a separate note, we've found 1 warning sign for Xinjiang Youhao(Group)Co.Ltd you'll probably want to know about.

While Xinjiang Youhao(Group)Co.Ltd 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com