To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. In light of that, from a first glance at Yantai Changyu Pioneer Wine (SZSE:000869), we've spotted some signs that it could be struggling, so let's investigate.

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

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 Yantai Changyu Pioneer Wine:

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

0.061 = CN¥685m ÷ (CN¥13b - CN¥2.2b) (Based on the trailing twelve months to December 2023).

Therefore, Yantai Changyu Pioneer Wine has an ROCE of 6.1%. In absolute terms, that's a low return and it also under-performs the Beverage industry average of 13%.

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

What The Trend Of ROCE Can Tell Us

There is reason to be cautious about Yantai Changyu Pioneer Wine, given the returns are trending downwards. To be more specific, the ROCE was 13% 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. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Yantai Changyu Pioneer Wine to turn into a multi-bagger.

What We Can Learn From Yantai Changyu Pioneer Wine's ROCE

In summary, it's unfortunate that Yantai Changyu Pioneer Wine is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 19% 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.

One more thing: We've identified 2 warning signs with Yantai Changyu Pioneer Wine (at least 1 which doesn't sit too well with us) , and understanding them would certainly be useful.

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.