To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. So after glancing at the trends within Henan Qingshuiyuan TechnologyLtd (SZSE:300437), we weren't too hopeful.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Henan Qingshuiyuan TechnologyLtd:

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

0.0041 = CN¥8.1m ÷ (CN¥2.8b - CN¥782m) (Based on the trailing twelve months to March 2024).

Therefore, Henan Qingshuiyuan TechnologyLtd has an ROCE of 0.4%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 5.8%.

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Henan Qingshuiyuan TechnologyLtd's past further, check out this free graph covering Henan Qingshuiyuan TechnologyLtd's past earnings, revenue and cash flow.

What Does the ROCE Trend For Henan Qingshuiyuan TechnologyLtd Tell Us?

There is reason to be cautious about Henan Qingshuiyuan TechnologyLtd, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 20% that they were earning five years ago. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Henan Qingshuiyuan TechnologyLtd becoming one if things continue as they have.

On a related note, Henan Qingshuiyuan TechnologyLtd has decreased its current liabilities to 28% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Henan Qingshuiyuan TechnologyLtd's ROCE

In summary, it's unfortunate that Henan Qingshuiyuan TechnologyLtd is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last five years have experienced a 10% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with Henan Qingshuiyuan TechnologyLtd (including 1 which is potentially serious) .

While Henan Qingshuiyuan TechnologyLtd 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.