When researching a stock for investment, what can tell us that the company is 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. So after we looked into Xinhuanet (SHSE:603888), the trends above didn't look too great.
Understanding 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 Xinhuanet, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.021 = CN¥77m ÷ (CN¥4.8b - CN¥1.0b) (Based on the trailing twelve months to September 2023).
Therefore, Xinhuanet has an ROCE of 2.1%. In absolute terms, that's a low return and it also under-performs the Media industry average of 4.9%.
View our latest analysis for Xinhuanet
Historical performance is a great place to start when researching a stock so above you can see the gauge for Xinhuanet's ROCE against it's prior returns. If you'd like to look at how Xinhuanet has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
In terms of Xinhuanet's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 6.8% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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 Xinhuanet to turn into a multi-bagger.
On a side note, Xinhuanet's current liabilities have increased over the last five years to 21% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 2.1%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.
In Conclusion...
All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. However the stock has delivered a 82% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.
Xinhuanet does have some risks, we noticed 4 warning signs (and 1 which is concerning) we think you should know about.
While Xinhuanet 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.