When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. In light of that, from a first glance at Tianjin Binhai Teda Logistics (Group) (HKG:8348), we've spotted some signs that it could be struggling, so let's investigate.
Understanding Return On Capital Employed (ROCE)
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. The formula for this calculation on Tianjin Binhai Teda Logistics (Group) is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.018 = CN¥19m ÷ (CN¥2.0b - CN¥908m) (Based on the trailing twelve months to June 2024).
Therefore, Tianjin Binhai Teda Logistics (Group) has an ROCE of 1.8%. In absolute terms, that's a low return and it also under-performs the Logistics industry average of 7.3%.
See our latest analysis for Tianjin Binhai Teda Logistics (Group)
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 , check out these free graphs detailing revenue and cash flow performance of Tianjin Binhai Teda Logistics (Group).
What Can We Tell From Tianjin Binhai Teda Logistics (Group)'s ROCE Trend?
There is reason to be cautious about Tianjin Binhai Teda Logistics (Group), given the returns are trending downwards. About five years ago, returns on capital were 5.9%, however they're now substantially lower than that as we saw above. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Tianjin Binhai Teda Logistics (Group) becoming one if things continue as they have.
On a side note, Tianjin Binhai Teda Logistics (Group) has done well to pay down its current liabilities to 46% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.
The Bottom Line On Tianjin Binhai Teda Logistics (Group)'s ROCE
In summary, it's unfortunate that Tianjin Binhai Teda Logistics (Group) is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 38% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
Tianjin Binhai Teda Logistics (Group) does have some risks though, and we've spotted 3 warning signs for Tianjin Binhai Teda Logistics (Group) that you might be interested in.
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.