Beijing Jingkelong (HKG:814) Has Some Difficulty Using Its Capital Effectively

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? 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. Having said that, after a brief look, Beijing Jingkelong (HKG:814) we aren't filled with optimism, but let's investigate further.

Return On Capital Employed (ROCE): What Is It?

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 Beijing Jingkelong, this is the formula:

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

0.022 = CN¥54m ÷ (CN¥7.0b - CN¥4.5b) (Based on the trailing twelve months to June 2024).

Thus, Beijing Jingkelong 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 7.5%.

View our latest analysis for Beijing Jingkelong

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

So How Is Beijing Jingkelong's ROCE Trending?

In terms of Beijing Jingkelong's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 9.7% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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 Beijing Jingkelong becoming one if things continue as they have.

On a side note, Beijing Jingkelong's current liabilities are still rather high at 64% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

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 64% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with Beijing Jingkelong (including 2 which shouldn't be ignored) .

While Beijing Jingkelong 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.