When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. 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. On that note, looking into Hebei Yangyuan ZhiHui Beverage (SHSE:603156), we weren't too upbeat about how things were going.
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. To calculate this metric for Hebei Yangyuan ZhiHui Beverage, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = CN¥1.9b ÷ (CN¥13b - CN¥2.5b) (Based on the trailing twelve months to September 2023).
Therefore, Hebei Yangyuan ZhiHui Beverage has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 7.6% generated by the Food industry.
See our latest analysis for Hebei Yangyuan ZhiHui Beverage
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Hebei Yangyuan ZhiHui Beverage's past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Hebei Yangyuan ZhiHui Beverage Tell Us?
In terms of Hebei Yangyuan ZhiHui Beverage's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 25% 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Hebei Yangyuan ZhiHui Beverage becoming one if things continue as they have.
The Bottom Line On Hebei Yangyuan ZhiHui Beverage's ROCE
All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. In spite of that, the stock has delivered a 36% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.
One more thing to note, we've identified 2 warning signs with Hebei Yangyuan ZhiHui Beverage and understanding these should be part of your investment process.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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.