Guangzhou Baiyun International Airport's (SHSE:600004) Returns On Capital Not Reflecting Well On The Business

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. Having said that, after a brief look, Guangzhou Baiyun International Airport (SHSE:600004) we aren't filled with optimism, but let's investigate further.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Guangzhou Baiyun International Airport:

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

0.054 = CN¥1.1b ÷ (CN¥27b - CN¥6.2b) (Based on the trailing twelve months to September 2024).

Thus, Guangzhou Baiyun International Airport has an ROCE of 5.4%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.9%.

See our latest analysis for Guangzhou Baiyun International Airport

In the above chart we have measured Guangzhou Baiyun International Airport's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Guangzhou Baiyun International Airport .

So How Is Guangzhou Baiyun International Airport's ROCE Trending?

In terms of Guangzhou Baiyun International Airport's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 6.9%, however they're now substantially lower than that as we saw above. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Guangzhou Baiyun International Airport becoming one if things continue as they have.

The Bottom Line On Guangzhou Baiyun International Airport's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Long term shareholders who've owned the stock over the last five years have experienced a 41% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know about the risks facing Guangzhou Baiyun International Airport, we've discovered 1 warning sign that you should be aware of.

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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.