Investors Could Be Concerned With Jilin Province Chuncheng Heating's (HKG:1853) Returns On Capital

What underlying fundamental trends can indicate that a company might be 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. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. Having said that, after a brief look, Jilin Province Chuncheng Heating (HKG:1853) we aren't filled with optimism, but let's investigate further.

Understanding Return On Capital Employed (ROCE)

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 Jilin Province Chuncheng Heating:

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

0.12 = CN¥154m ÷ (CN¥2.0b - CN¥794m) (Based on the trailing twelve months to June 2024).

So, Jilin Province Chuncheng Heating has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 5.8% generated by the Water Utilities industry.

Check out our latest analysis for Jilin Province Chuncheng Heating

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

How Are Returns Trending?

We are a bit worried about the trend of returns on capital at Jilin Province Chuncheng Heating. To be more specific, the ROCE was 16% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Jilin Province Chuncheng Heating to turn into a multi-bagger.

The Key Takeaway

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Jilin Province Chuncheng Heating (of which 1 makes us a bit uncomfortable!) that you should know about.

While Jilin Province Chuncheng Heating 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.