Returns On Capital At Datang Environment Industry Group (HKG:1272) Paint A Concerning Picture

When researching a stock for investment, what can tell us that the company is in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates the company is producing less profit from its investments and its total assets are decreasing. In light of that, from a first glance at Datang Environment Industry Group (HKG:1272), we've spotted some signs that it could be struggling, so let's investigate.

What Is 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 Datang Environment Industry Group:

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

0.043 = CN¥399m ÷ (CN¥19b - CN¥9.5b) (Based on the trailing twelve months to March 2023).

Therefore, Datang Environment Industry Group has an ROCE of 4.3%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 7.5%.

Check out our latest analysis for Datang Environment Industry Group

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

The Trend Of ROCE

In terms of Datang Environment Industry Group's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 13%, 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 Datang Environment Industry Group to turn into a multi-bagger.

On a side note, Datang Environment Industry Group's current liabilities are still rather high at 51% of total assets. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Datang Environment Industry Group's ROCE

In summary, it's unfortunate that Datang Environment Industry Group is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 61% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with Datang Environment Industry Group (including 2 which don't sit too well with us) .

While Datang Environment Industry Group 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.