Returns On Capital Signal Difficult Times Ahead For Shanghai Xujiahui Commercial (SZSE:002561)

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 Shanghai Xujiahui Commercial (SZSE:002561), so let's see why.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Shanghai Xujiahui Commercial, this is the formula:

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

0.03 = CN¥73m ÷ (CN¥2.8b - CN¥318m) (Based on the trailing twelve months to September 2023).

So, Shanghai Xujiahui Commercial has an ROCE of 3.0%. Ultimately, that's a low return and it under-performs the Multiline Retail industry average of 5.3%.

See our latest analysis for Shanghai Xujiahui Commercial

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shanghai Xujiahui Commercial's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Shanghai Xujiahui Commercial.

What Can We Tell From Shanghai Xujiahui Commercial's ROCE Trend?

We are a bit worried about the trend of returns on capital at Shanghai Xujiahui Commercial. To be more specific, the ROCE was 13% 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. 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 Shanghai Xujiahui 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 12% 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.

One more thing: We've identified 3 warning signs with Shanghai Xujiahui Commercial (at least 1 which is significant) , and understanding these would certainly be useful.

While Shanghai Xujiahui 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.