These Return Metrics Don't Make Sichuan Zhongguang Lightning Protection Technologies (SZSE:300414) Look Too Strong

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing 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. On that note, looking into Sichuan Zhongguang Lightning Protection Technologies (SZSE:300414), we weren't too upbeat about how things were going.

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

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 Sichuan Zhongguang Lightning Protection Technologies is:

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

0.003 = CN¥3.0m ÷ (CN¥1.1b - CN¥141m) (Based on the trailing twelve months to June 2024).

Thus, Sichuan Zhongguang Lightning Protection Technologies has an ROCE of 0.3%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 5.9%.

Check out our latest analysis for Sichuan Zhongguang Lightning Protection Technologies

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

How Are Returns Trending?

In terms of Sichuan Zhongguang Lightning Protection Technologies' historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 3.5% 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. 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 Sichuan Zhongguang Lightning Protection Technologies becoming one if things continue as they have.

The Bottom Line On Sichuan Zhongguang Lightning Protection Technologies' 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. Investors haven't taken kindly to these developments, since the stock has declined 40% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing, we've spotted 1 warning sign facing Sichuan Zhongguang Lightning Protection Technologies that you might find interesting.

While Sichuan Zhongguang Lightning Protection Technologies 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.