Returns On Capital Signal Difficult Times Ahead For Ningbo Ligong Environment And Energy TechnologyLtd (SZSE:002322)

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base 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 Ningbo Ligong Environment And Energy TechnologyLtd (SZSE:002322), so let's see why.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Ningbo Ligong Environment And Energy TechnologyLtd is:

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

0.063 = CN¥203m ÷ (CN¥3.6b - CN¥357m) (Based on the trailing twelve months to September 2023).

Thus, Ningbo Ligong Environment And Energy TechnologyLtd has an ROCE of 6.3%. On its own, that's a low figure but it's around the 6.5% average generated by the Electrical industry.

View our latest analysis for Ningbo Ligong Environment And Energy TechnologyLtd

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're interested in investigating Ningbo Ligong Environment And Energy TechnologyLtd's past further, check out this free graph covering Ningbo Ligong Environment And Energy TechnologyLtd's past earnings, revenue and cash flow.

What Can We Tell From Ningbo Ligong Environment And Energy TechnologyLtd's ROCE Trend?

In terms of Ningbo Ligong Environment And Energy TechnologyLtd's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 11% 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. If these trends continue, we wouldn't expect Ningbo Ligong Environment And Energy TechnologyLtd to turn into a multi-bagger.

The Bottom Line On Ningbo Ligong Environment And Energy TechnologyLtd's ROCE

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. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a final note, we've found 1 warning sign for Ningbo Ligong Environment And Energy TechnologyLtd that we think you should be aware of.

While Ningbo Ligong Environment And Energy TechnologyLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.