Ningbo Zhongbai (SHSE:600857) Could Be At Risk Of Shrinking As A Company

What underlying fundamental trends can indicate that a company might be in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. And from a first read, things don't look too good at Ningbo Zhongbai (SHSE:600857), so let's see why.

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What Is 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. To calculate this metric for Ningbo Zhongbai, this is the formula:

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

0.0081 = CN¥7.1m ÷ (CN¥994m - CN¥117m) (Based on the trailing twelve months to September 2024).

Therefore, Ningbo Zhongbai has an ROCE of 0.8%. In absolute terms, that's a low return and it also under-performs the Multiline Retail industry average of 3.9%.

Check out our latest analysis for Ningbo Zhongbai

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Ningbo Zhongbai has performed in the past in other metrics, you can view this free graph of Ningbo Zhongbai's past earnings, revenue and cash flow.

How Are Returns Trending?

There is reason to be cautious about Ningbo Zhongbai, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 3.1% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Ningbo Zhongbai to turn into a multi-bagger.

The Bottom Line

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors haven't taken kindly to these developments, since the stock has declined 14% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Ningbo Zhongbai does have some risks though, and we've spotted 2 warning signs for Ningbo Zhongbai that you might be interested in.

While Ningbo Zhongbai 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.