The Returns On Capital At Zhengzhou Coal Industry & Electric Power (SHSE:600121) Don't Inspire Confidence

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. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. On that note, looking into Zhengzhou Coal Industry & Electric Power (SHSE:600121), we weren't too upbeat about how things were going.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Zhengzhou Coal Industry & Electric Power:

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

0.09 = CN¥345m ÷ (CN¥14b - CN¥10.0b) (Based on the trailing twelve months to June 2024).

Thus, Zhengzhou Coal Industry & Electric Power has an ROCE of 9.0%. On its own, that's a low figure but it's around the 11% average generated by the Oil and Gas industry.

View our latest analysis for Zhengzhou Coal Industry & Electric Power

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

How Are Returns Trending?

We are a bit anxious about the trends of ROCE at Zhengzhou Coal Industry & Electric Power. To be more specific, today's ROCE was 12% five years ago but has since fallen to 9.0%. In addition to that, Zhengzhou Coal Industry & Electric Power is now employing 23% less capital than it was five years ago. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. If these underlying trends continue, we wouldn't be too optimistic going forward.

Another thing to note, Zhengzhou Coal Industry & Electric Power has a high ratio of current liabilities to total assets of 72%. 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.

The Bottom Line On Zhengzhou Coal Industry & Electric Power's ROCE

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. Yet despite these concerning fundamentals, the stock has performed strongly with a 75% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

While Zhengzhou Coal Industry & Electric Power doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation for 600121 on our platform.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.