Shanghai Xujiahui Commercial (SZSE:002561) Could Be Struggling To Allocate Capital

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. 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.

Understanding Return On Capital Employed (ROCE)

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 Shanghai Xujiahui Commercial is:

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

0.0036 = CN¥8.7m ÷ (CN¥2.6b - CN¥237m) (Based on the trailing twelve months to September 2024).

Thus, Shanghai Xujiahui Commercial has an ROCE of 0.4%. Ultimately, that's a low return and it under-performs the Multiline Retail industry average of 3.9%.

View our latest analysis for Shanghai Xujiahui Commercial

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Shanghai Xujiahui Commercial.

So How Is Shanghai Xujiahui Commercial's ROCE Trending?

There is reason to be cautious about Shanghai Xujiahui Commercial, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 11% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Shanghai Xujiahui Commercial becoming one if things continue as they have.

The Bottom Line On Shanghai Xujiahui Commercial's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors must expect better things on the horizon though because the stock has risen 31% 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 4 warning signs with Shanghai Xujiahui Commercial (at least 2 which make us uncomfortable) , 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.