What financial metrics can indicate to us that a company is maturing or even in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after we looked into Sichuan Golden Summit (group) (SHSE:600678), the trends above didn't look too great.
Return On Capital Employed (ROCE): What Is It?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Sichuan Golden Summit (group):
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.047 = CN¥26m ÷ (CN¥799m - CN¥254m) (Based on the trailing twelve months to September 2023).
Thus, Sichuan Golden Summit (group) has an ROCE of 4.7%. In absolute terms, that's a low return and it also under-performs the Basic Materials industry average of 6.1%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Sichuan Golden Summit (group)'s ROCE against it's prior returns. If you're interested in investigating Sichuan Golden Summit (group)'s past further, check out this free graph covering Sichuan Golden Summit (group)'s past earnings, revenue and cash flow.
So How Is Sichuan Golden Summit (group)'s ROCE Trending?
We are a bit worried about the trend of returns on capital at Sichuan Golden Summit (group). To be more specific, the ROCE was 9.3% 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. 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. If these trends continue, we wouldn't expect Sichuan Golden Summit (group) to turn into a multi-bagger.
While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 32%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.
In Conclusion...
In summary, it's unfortunate that Sichuan Golden Summit (group) is generating lower returns from the same amount of capital. And long term shareholders have watched their investments stay flat over the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
If you want to know some of the risks facing Sichuan Golden Summit (group) we've found 5 warning signs (4 are significant!) that you should be aware of before investing here.
While Sichuan Golden Summit (group) may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.