The Returns On Capital At Qingdao Kingking Applied Chemistry (SZSE:002094) Don't Inspire Confidence

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. Having said that, after a brief look, Qingdao Kingking Applied Chemistry (SZSE:002094) we aren't filled with optimism, but let's investigate further.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Qingdao Kingking Applied Chemistry:

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

0.006 = CN¥8.9m ÷ (CN¥3.2b - CN¥1.8b) (Based on the trailing twelve months to March 2024).

Therefore, Qingdao Kingking Applied Chemistry has an ROCE of 0.6%. Ultimately, that's a low return and it under-performs the Personal Products industry average of 9.8%.

Check out our latest analysis for Qingdao Kingking Applied Chemistry

Historical performance is a great place to start when researching a stock so above you can see the gauge for Qingdao Kingking Applied Chemistry's ROCE against it's prior returns. If you're interested in investigating Qingdao Kingking Applied Chemistry's past further, check out this free graph covering Qingdao Kingking Applied Chemistry's past earnings, revenue and cash flow.

What Does the ROCE Trend For Qingdao Kingking Applied Chemistry Tell Us?

In terms of Qingdao Kingking Applied Chemistry's historical ROCE trend, it isn't fantastic. To be more specific, today's ROCE was 8.8% five years ago but has since fallen to 0.6%. What's equally concerning is that the amount of capital deployed in the business has shrunk by 65% over that same period. 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. If these underlying trends continue, we wouldn't be too optimistic going forward.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 54%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 0.6%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

The Bottom Line

To see Qingdao Kingking Applied Chemistry reducing the capital employed in the business in tandem with diminishing returns, is concerning. Investors haven't taken kindly to these developments, since the stock has declined 51% 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 identified 2 warning signs with Qingdao Kingking Applied Chemistry (at least 1 which is potentially serious) , and understanding these would certainly be useful.

While Qingdao Kingking Applied Chemistry 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.