Beijing Jingkelong (HKG:814) May Have Issues Allocating Its Capital

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. 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. On that note, looking into Beijing Jingkelong (HKG:814), we weren't too upbeat about how things were going.

Understanding 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. Analysts use this formula to calculate it for Beijing Jingkelong:

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

0.061 = CN¥141m ÷ (CN¥7.1b - CN¥4.8b) (Based on the trailing twelve months to December 2023).

Therefore, Beijing Jingkelong has an ROCE of 6.1%. On its own, that's a low figure but it's around the 7.3% average generated by the Consumer Retailing industry.

Check out our latest analysis for Beijing Jingkelong

Historical performance is a great place to start when researching a stock so above you can see the gauge for Beijing Jingkelong's ROCE against it's prior returns. If you'd like to look at how Beijing Jingkelong has performed in the past in other metrics, you can view this free graph of Beijing Jingkelong's past earnings, revenue and cash flow.

So How Is Beijing Jingkelong's ROCE Trending?

The trend of ROCE at Beijing Jingkelong is showing some signs of weakness. Unfortunately, returns have declined substantially over the last five years to the 6.1% we see today. What's equally concerning is that the amount of capital deployed in the business has shrunk by 28% over that same period. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.

On a side note, Beijing Jingkelong's current liabilities are still rather high at 68% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. It should come as no surprise then that the stock has fallen 65% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with Beijing Jingkelong (including 2 which don't sit too well with us) .

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.