When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. 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. So after we looked into Guangxi Fenglin Wood Industry GroupLtd (SHSE:601996), the trends above didn't look too great.

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. The formula for this calculation on Guangxi Fenglin Wood Industry GroupLtd is:

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

0.025 = CN¥74m ÷ (CN¥3.7b - CN¥737m) (Based on the trailing twelve months to September 2023).

Thus, Guangxi Fenglin Wood Industry GroupLtd has an ROCE of 2.5%. Even though it's in line with the industry average of 3.4%, it's still a low return by itself.

Above you can see how the current ROCE for Guangxi Fenglin Wood Industry GroupLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Guangxi Fenglin Wood Industry GroupLtd Tell Us?

There is reason to be cautious about Guangxi Fenglin Wood Industry GroupLtd, given the returns are trending downwards. To be more specific, the ROCE was 3.8% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Guangxi Fenglin Wood Industry GroupLtd to turn into a multi-bagger.

In Conclusion...

In summary, it's unfortunate that Guangxi Fenglin Wood Industry GroupLtd is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 18% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you'd like to know about the risks facing Guangxi Fenglin Wood Industry GroupLtd, we've discovered 2 warning signs that you should be aware of.

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.