Returns On Capital Signal Difficult Times Ahead For Tongdao Liepin Group (HKG:6100)

When researching a stock for investment, what can tell us that the company is in decline? 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 indicates the company is producing less profit from its investments and its total assets are decreasing. Having said that, after a brief look, Tongdao Liepin Group (HKG:6100) we aren't filled with optimism, but let's investigate further.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Tongdao Liepin Group, this is the formula:

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

0.013 = CN¥42m ÷ (CN¥4.4b - CN¥1.2b) (Based on the trailing twelve months to September 2024).

So, Tongdao Liepin Group has an ROCE of 1.3%. In absolute terms, that's a low return and it also under-performs the Interactive Media and Services industry average of 9.4%.

Check out our latest analysis for Tongdao Liepin Group

Above you can see how the current ROCE for Tongdao Liepin Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Tongdao Liepin Group for free.

The Trend Of ROCE

In terms of Tongdao Liepin Group's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 2.5%, 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. 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 Tongdao Liepin Group to turn into a multi-bagger.

In Conclusion...

In summary, it's unfortunate that Tongdao Liepin Group is generating lower returns from the same amount of capital. We expect this has contributed to the stock plummeting 82% during the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing, we've spotted 2 warning signs facing Tongdao Liepin Group that you might find interesting.

While Tongdao Liepin Group 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.