Guangdong Yueyun Transportation's (HKG:3399) Returns On Capital Not Reflecting Well On The Business

What underlying fundamental trends can indicate that a company might be in decline? 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. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. And from a first read, things don't look too good at Guangdong Yueyun Transportation (HKG:3399), so let's see why.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for Guangdong Yueyun Transportation, this is the formula:

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

0.024 = CN¥147m ÷ (CN¥9.2b - CN¥3.0b) (Based on the trailing twelve months to June 2023).

Thus, Guangdong Yueyun Transportation has an ROCE of 2.4%. In absolute terms, that's a low return and it also under-performs the Logistics industry average of 5.1%.

View our latest analysis for Guangdong Yueyun Transportation

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

What Does the ROCE Trend For Guangdong Yueyun Transportation Tell Us?

There is reason to be cautious about Guangdong Yueyun Transportation, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 12% 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. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Guangdong Yueyun Transportation becoming one if things continue as they have.

The Bottom Line On Guangdong Yueyun Transportation's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors haven't taken kindly to these developments, since the stock has declined 58% from where it was five years ago. 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 1 warning sign for Guangdong Yueyun Transportation you'll probably want to know about.

While Guangdong Yueyun Transportation isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.