When researching a stock for investment, what can tell us that the company is 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. Having said that, after a brief look, Henan Zhongyuan Expressway (SHSE:600020) we aren't filled with optimism, but let's investigate further.

Understanding 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. The formula for this calculation on Henan Zhongyuan Expressway is:

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

0.042 = CN¥1.8b ÷ (CN¥50b - CN¥7.2b) (Based on the trailing twelve months to September 2023).

So, Henan Zhongyuan Expressway has an ROCE of 4.2%. On its own, that's a low figure but it's around the 5.2% average generated by the Infrastructure industry.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Henan Zhongyuan Expressway's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Henan Zhongyuan Expressway, check out these free graphs here.

What Can We Tell From Henan Zhongyuan Expressway's ROCE Trend?

We are a bit worried about the trend of returns on capital at Henan Zhongyuan Expressway. To be more specific, the ROCE was 7.1% 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. 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 Henan Zhongyuan Expressway to turn into a multi-bagger.

The Key Takeaway

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing to note, we've identified 2 warning signs with Henan Zhongyuan Expressway and understanding these should be part of your investment process.

While Henan Zhongyuan Expressway 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.