Xiabuxiabu Catering Management (China) Holdings (HKG:520) May Have Issues Allocating Its 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? 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. Basically the company is earning less on its investments and it is also reducing its total assets. So after we looked into Xiabuxiabu Catering Management (China) Holdings (HKG:520), the trends above didn't look too great.

What Is 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 Xiabuxiabu Catering Management (China) Holdings:

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

0.013 = CN¥29m ÷ (CN¥4.1b - CN¥1.9b) (Based on the trailing twelve months to December 2023).

Therefore, Xiabuxiabu Catering Management (China) Holdings has an ROCE of 1.3%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 6.1%.

See our latest analysis for Xiabuxiabu Catering Management (China) Holdings

In the above chart we have measured Xiabuxiabu Catering Management (China) Holdings' 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 Xiabuxiabu Catering Management (China) Holdings .

What Does the ROCE Trend For Xiabuxiabu Catering Management (China) Holdings Tell Us?

There is reason to be cautious about Xiabuxiabu Catering Management (China) Holdings, given the returns are trending downwards. To be more specific, the ROCE was 25% 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. 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. If these trends continue, we wouldn't expect Xiabuxiabu Catering Management (China) Holdings to turn into a multi-bagger.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 46%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

What We Can Learn From Xiabuxiabu Catering Management (China) Holdings' ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. We expect this has contributed to the stock plummeting 85% during the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a separate note, we've found 1 warning sign for Xiabuxiabu Catering Management (China) Holdings you'll probably want to know about.

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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.