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. Basically the company is earning less on its investments and it is also reducing its total assets. So after we looked into Huida Sanitary WareLtd (SHSE:603385), the trends above didn't look too great.

What Is 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 Huida Sanitary WareLtd is:

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

0.039 = CN¥156m ÷ (CN¥5.8b - CN¥1.7b) (Based on the trailing twelve months to March 2024).

Therefore, Huida Sanitary WareLtd has an ROCE of 3.9%. Ultimately, that's a low return and it under-performs the Building industry average of 8.7%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Huida Sanitary WareLtd's ROCE against it's prior returns. If you're interested in investigating Huida Sanitary WareLtd's past further, check out this free graph covering Huida Sanitary WareLtd's past earnings, revenue and cash flow.

How Are Returns Trending?

There is reason to be cautious about Huida Sanitary WareLtd, given the returns are trending downwards. To be more specific, the ROCE was 6.9% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Huida Sanitary WareLtd becoming one if things continue as they have.

The Bottom Line

In summary, it's unfortunate that Huida Sanitary WareLtd is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 28% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Huida Sanitary WareLtd does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

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.