Maoye Commercial (SHSE:600828) Could Be Struggling To Allocate Capital

What financial metrics can indicate to us that a company is maturing or even in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. And from a first read, things don't look too good at Maoye Commercial (SHSE:600828), so let's see why.

What Is 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 Maoye Commercial, this is the formula:

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

0.035 = CN¥491m ÷ (CN¥19b - CN¥4.9b) (Based on the trailing twelve months to September 2024).

Therefore, Maoye Commercial has an ROCE of 3.5%. On its own, that's a low figure but it's around the 3.9% average generated by the Multiline Retail industry.

View our latest analysis for Maoye Commercial

Historical performance is a great place to start when researching a stock so above you can see the gauge for Maoye Commercial's ROCE against it's prior returns. If you'd like to look at how Maoye Commercial has performed in the past in other metrics, you can view this free graph of Maoye Commercial's past earnings, revenue and cash flow.

What Does the ROCE Trend For Maoye Commercial Tell Us?

There is reason to be cautious about Maoye Commercial, given the returns are trending downwards. To be more specific, the ROCE was 17% 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. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Maoye Commercial to turn into a multi-bagger.

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. Investors must expect better things on the horizon though because the stock has risen 9.4% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Maoye Commercial does come with some risks though, we found 6 warning signs in our investment analysis, and 2 of those are potentially serious...

While Maoye Commercial 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.