Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Basically the company is earning less on its investments and it is also reducing its total assets. In light of that, from a first glance at Guangdong Mingzhu GroupLtd (SHSE:600382), we've spotted some signs that it could be struggling, so let's investigate.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Guangdong Mingzhu GroupLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.075 = CN¥275m ÷ (CN¥4.1b - CN¥474m) (Based on the trailing twelve months to September 2023).
So, Guangdong Mingzhu GroupLtd has an ROCE of 7.5%. On its own, that's a low figure but it's around the 7.3% average generated by the Trade Distributors industry.
See our latest analysis for Guangdong Mingzhu GroupLtd
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 want to delve into the historical earnings, revenue and cash flow of Guangdong Mingzhu GroupLtd, check out these free graphs here.
The Trend Of ROCE
In terms of Guangdong Mingzhu GroupLtd's historical ROCE trend, it isn't fantastic. Unfortunately, returns have declined substantially over the last five years to the 7.5% we see today. What's equally concerning is that the amount of capital deployed in the business has shrunk by 42% over that same period. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.
What We Can Learn From Guangdong Mingzhu GroupLtd's ROCE
In summary, it's unfortunate that Guangdong Mingzhu GroupLtd is shrinking its capital base and also generating lower returns. In spite of that, the stock has delivered a 22% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.
If you'd like to know more about Guangdong Mingzhu GroupLtd, we've spotted 2 warning signs, and 1 of them is significant.
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.