Fujian Start GroupLtd (SHSE:600734) Could Be Struggling To Allocate Capital

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. 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. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. Having said that, after a brief look, Fujian Start GroupLtd (SHSE:600734) we aren't filled with optimism, but let's investigate further.

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 Fujian Start GroupLtd, this is the formula:

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

0.046 = CN¥18m ÷ (CN¥780m - CN¥394m) (Based on the trailing twelve months to March 2024).

So, Fujian Start GroupLtd has an ROCE of 4.6%. Even though it's in line with the industry average of 5.3%, it's still a low return by itself.

View our latest analysis for Fujian Start GroupLtd

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 Fujian Start GroupLtd has performed in the past in other metrics, you can view this free graph of Fujian Start GroupLtd's past earnings, revenue and cash flow.

How Are Returns Trending?

The trend of ROCE at Fujian Start GroupLtd is showing some signs of weakness. Unfortunately, returns have declined substantially over the last five years to the 4.6% we see today. On top of that, the business is utilizing 86% less capital within its operations. The fact that both are shrinking is an indication that the business is going through some tough times. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

On a side note, Fujian Start GroupLtd has done well to pay down its current liabilities to 50% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

What We Can Learn From Fujian Start GroupLtd's ROCE

To see Fujian Start GroupLtd reducing the capital employed in the business in tandem with diminishing returns, is concerning. Long term shareholders who've owned the stock over the last five years have experienced a 63% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing to note, we've identified 1 warning sign with Fujian Start GroupLtd and understanding it should be part of your investment process.

While Fujian Start GroupLtd 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.