These Return Metrics Don't Make Guangxi Fenglin Wood Industry GroupLtd (SHSE:601996) Look Too Strong

When researching a stock for investment, what can tell us that the company is in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. In light of that, from a first glance at Guangxi Fenglin Wood Industry GroupLtd (SHSE:601996), we've spotted some signs that it could be struggling, so let's investigate.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Guangxi Fenglin Wood Industry GroupLtd:

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

0.025 = CN¥72m ÷ (CN¥3.6b - CN¥724m) (Based on the trailing twelve months to March 2024).

Thus, Guangxi Fenglin Wood Industry GroupLtd has an ROCE of 2.5%. In absolute terms, that's a low return and it also under-performs the Forestry industry average of 6.3%.

Check out our latest analysis for Guangxi Fenglin Wood Industry GroupLtd

In the above chart we have measured Guangxi Fenglin Wood Industry GroupLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Guangxi Fenglin Wood Industry GroupLtd .

The Trend Of ROCE

We are a bit worried about the trend of returns on capital at Guangxi Fenglin Wood Industry GroupLtd. To be more specific, the ROCE was 4.9% five years ago, but since then it has dropped noticeably. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Guangxi Fenglin Wood Industry GroupLtd becoming one if things continue as they have.

In Conclusion...

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. It should come as no surprise then that the stock has fallen 29% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing, we've spotted 1 warning sign facing Guangxi Fenglin Wood Industry GroupLtd that you might find interesting.

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.