Returns On Capital Signal Difficult Times Ahead For China Nonferrous Metal Industry's Foreign Engineering and ConstructionLtd (SZSE:000758)

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? 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 reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. In light of that, from a first glance at China Nonferrous Metal Industry's Foreign Engineering and ConstructionLtd (SZSE:000758), we've spotted some signs that it could be struggling, so let's investigate.

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. Analysts use this formula to calculate it for China Nonferrous Metal Industry's Foreign Engineering and ConstructionLtd:

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

0.037 = CN¥429m ÷ (CN¥19b - CN¥7.8b) (Based on the trailing twelve months to September 2023).

So, China Nonferrous Metal Industry's Foreign Engineering and ConstructionLtd has an ROCE of 3.7%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 6.9%.

View our latest analysis for China Nonferrous Metal Industry's Foreign Engineering and ConstructionLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of China Nonferrous Metal Industry's Foreign Engineering and ConstructionLtd.

The Trend Of ROCE

In terms of China Nonferrous Metal Industry's Foreign Engineering and ConstructionLtd's historical ROCE trend, it isn't fantastic. To be more specific, today's ROCE was 6.2% five years ago but has since fallen to 3.7%. What's equally concerning is that the amount of capital deployed in the business has shrunk by 21% 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. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

On a separate but related note, it's important to know that China Nonferrous Metal Industry's Foreign Engineering and ConstructionLtd has a current liabilities to total assets ratio of 41%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

To see China Nonferrous Metal Industry's Foreign Engineering and ConstructionLtd reducing the capital employed in the business in tandem with diminishing returns, is concerning. Investors must expect better things on the horizon though because the stock has risen 3.4% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you want to continue researching China Nonferrous Metal Industry's Foreign Engineering and ConstructionLtd, you might be interested to know about the 2 warning signs that our analysis has discovered.

While China Nonferrous Metal Industry's Foreign Engineering and ConstructionLtd 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.