Returns On Capital At Fujian Minfa Aluminium (SZSE:002578) Paint A Concerning Picture

What underlying fundamental trends can indicate that a company might be in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. 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 Fujian Minfa Aluminium (SZSE:002578), we've spotted some signs that it could be struggling, so let's investigate.

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. To calculate this metric for Fujian Minfa Aluminium, this is the formula:

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

0.014 = CN¥23m ÷ (CN¥2.6b - CN¥982m) (Based on the trailing twelve months to March 2024).

So, Fujian Minfa Aluminium has an ROCE of 1.4%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 6.7%.

See our latest analysis for Fujian Minfa Aluminium

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

How Are Returns Trending?

In terms of Fujian Minfa Aluminium's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 2.3%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Fujian Minfa Aluminium to turn into a multi-bagger.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 38%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

What We Can Learn From Fujian Minfa Aluminium's ROCE

In summary, it's unfortunate that Fujian Minfa Aluminium is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 16% 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 3 warning signs with Fujian Minfa Aluminium (at least 2 which are a bit unpleasant) , and understanding them would certainly be useful.

While Fujian Minfa Aluminium may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.