Capital Allocation Trends At Changan Minsheng APLL Logistics (HKG:1292) Aren't Ideal

What financial metrics can indicate to us that a company is maturing or even in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. So after glancing at the trends within Changan Minsheng APLL Logistics (HKG:1292), we weren't too hopeful.

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

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. Analysts use this formula to calculate it for Changan Minsheng APLL Logistics:

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

0.017 = CN¥41m ÷ (CN¥5.4b - CN¥3.0b) (Based on the trailing twelve months to June 2023).

Therefore, Changan Minsheng APLL Logistics has an ROCE of 1.7%. In absolute terms, that's a low return and it also under-performs the Logistics industry average of 4.9%.

View our latest analysis for Changan Minsheng APLL Logistics

Historical performance is a great place to start when researching a stock so above you can see the gauge for Changan Minsheng APLL Logistics' ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Changan Minsheng APLL Logistics.

What Can We Tell From Changan Minsheng APLL Logistics' ROCE Trend?

We are a bit worried about the trend of returns on capital at Changan Minsheng APLL Logistics. Unfortunately the returns on capital have diminished from the 8.3% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Changan Minsheng APLL Logistics to turn into a multi-bagger.

On a separate but related note, it's important to know that Changan Minsheng APLL Logistics has a current liabilities to total assets ratio of 55%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Changan Minsheng APLL Logistics' ROCE

In summary, it's unfortunate that Changan Minsheng APLL Logistics is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 30% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a separate note, we've found 2 warning signs for Changan Minsheng APLL Logistics you'll probably want to know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.