What financial metrics can indicate to us that a company is maturing or even in decline? 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. 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 China Nonferrous Metal Industry's Foreign Engineering and ConstructionLtd (SZSE:000758), so let's see why.
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. Analysts use this formula to calculate it for China Nonferrous Metal Industry's Foreign Engineering and ConstructionLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.037 = CN¥429m ÷ (CN¥19b - CN¥7.8b) (Based on the trailing twelve months to September 2023).
Thus, China Nonferrous Metal Industry's Foreign Engineering and ConstructionLtd has an ROCE of 3.7%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 6.2%.
View our latest analysis for China Nonferrous Metal Industry's Foreign Engineering and ConstructionLtd
Historical performance is a great place to start when researching a stock so above you can see the gauge for China Nonferrous Metal Industry's Foreign Engineering and ConstructionLtd's ROCE against it's prior returns. If you're interested in investigating China Nonferrous Metal Industry's Foreign Engineering and ConstructionLtd's past further, check out this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
The trend of returns that China Nonferrous Metal Industry's Foreign Engineering and ConstructionLtd is generating are raising some concerns. The company used to generate 6.2% on its capital five years ago but it has since fallen noticeably. In addition to that, China Nonferrous Metal Industry's Foreign Engineering and ConstructionLtd is now employing 21% less capital than it was five years ago. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.
On a separate but related note, it's important to know that China Nonferrous Metal Industry's Foreign Engineering and ConstructionLtd has a current liabilities to total assets ratio of 41%, which we'd consider pretty high. 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.
What We Can Learn From China Nonferrous Metal Industry's Foreign Engineering and ConstructionLtd's ROCE
In summary, it's unfortunate that China Nonferrous Metal Industry's Foreign Engineering and ConstructionLtd is shrinking its capital base and also generating lower returns. Investors must expect better things on the horizon though because the stock has risen 18% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.
Like most companies, China Nonferrous Metal Industry's Foreign Engineering and ConstructionLtd does come with some risks, and we've found 2 warning signs that you should be aware of.
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.