Cec Environmental ProtectionLtd's (SZSE:300172) Returns On Capital Tell Us There Is Reason To Feel Uneasy

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. Having said that, after a brief look, Cec Environmental ProtectionLtd (SZSE:300172) we aren't filled with optimism, but let's investigate further.

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

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. To calculate this metric for Cec Environmental ProtectionLtd, this is the formula:

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

0.03 = CN¥62m ÷ (CN¥2.7b - CN¥666m) (Based on the trailing twelve months to September 2024).

So, Cec Environmental ProtectionLtd has an ROCE of 3.0%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 5.3%.

Check out our latest analysis for Cec Environmental ProtectionLtd

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

What Does the ROCE Trend For Cec Environmental ProtectionLtd Tell Us?

In terms of Cec Environmental ProtectionLtd's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 5.6%, however they're now substantially lower than that as we saw above. 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 Cec Environmental ProtectionLtd to turn into a multi-bagger.

The Bottom Line On Cec Environmental ProtectionLtd's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors must expect better things on the horizon though because the stock has risen 24% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Cec Environmental ProtectionLtd (of which 1 is a bit unpleasant!) that you should know about.

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.