Investors Could Be Concerned With Sanjiang Shopping ClubLtd’s (SHSE:601116) Returns On Capital

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? More often than not, we’ll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it’s shrinking its base of capital employed. And from a first read, things don’t look too good at Sanjiang Shopping ClubLtd (SHSE:601116), so let’s see why.

Understanding 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 Sanjiang Shopping ClubLtd, this is the formula:

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

0.022 = CN¥74m ÷ (CN¥4.9b – CN¥1.6b) (Based on the trailing twelve months to June 2024).

Therefore, Sanjiang Shopping ClubLtd has an ROCE of 2.2%. In absolute terms, that’s a low return and it also under-performs the Consumer Retailing industry average of 6.1%.

See our latest analysis for Sanjiang Shopping ClubLtd

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

The Trend Of ROCE

In terms of Sanjiang Shopping ClubLtd’s historical ROCE movements, the trend doesn’t inspire confidence. Unfortunately the returns on capital have diminished from the 3.0% that they were earning five years ago. 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 Sanjiang Shopping ClubLtd to turn into a multi-bagger.

In Conclusion…

In the end, the trend of lower returns on the same amount of capital isn’t typically an indication that we’re looking at a growth stock. Investors haven’t taken kindly to these developments, since the stock has declined 25% from where it was five years ago. With underlying trends that aren’t great in these areas, we’d consider looking elsewhere.

Sanjiang Shopping ClubLtd does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit concerning…

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.

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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.