What underlying fundamental trends can indicate that a company might be in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base 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. And from a first read, things don't look too good at Hebei Jianxin Chemical (SZSE:300107), so let's see why.

What Is Return On Capital Employed (ROCE)?

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 Hebei Jianxin Chemical:

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

0.0011 = CN¥1.7m ÷ (CN¥1.7b - CN¥177m) (Based on the trailing twelve months to March 2024).

So, Hebei Jianxin Chemical has an ROCE of 0.1%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 5.7%.

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Hebei Jianxin Chemical.

So How Is Hebei Jianxin Chemical's ROCE Trending?

We are a bit worried about the trend of returns on capital at Hebei Jianxin Chemical. Unfortunately the returns on capital have diminished from the 44% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Hebei Jianxin Chemical becoming one if things continue as they have.

The Key Takeaway

In summary, it's unfortunate that Hebei Jianxin Chemical is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 5.5% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Hebei Jianxin Chemical does have some risks, we noticed 3 warning signs (and 2 which don't sit too well with us) we think you should know about.

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.