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 Qingdao Kingking Applied Chemistry (SZSE:002094), we weren't too hopeful.

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 Qingdao Kingking Applied Chemistry:

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

0.023 = CN¥34m ÷ (CN¥3.6b - CN¥2.0b) (Based on the trailing twelve months to June 2024).

Therefore, Qingdao Kingking Applied Chemistry has an ROCE of 2.3%. Ultimately, that's a low return and it under-performs the Personal Products industry average of 8.2%.

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 Qingdao Kingking Applied Chemistry.

What The Trend Of ROCE Can Tell Us

We are a bit anxious about the trends of ROCE at Qingdao Kingking Applied Chemistry. To be more specific, today's ROCE was 7.2% five years ago but has since fallen to 2.3%. In addition to that, Qingdao Kingking Applied Chemistry is now employing 60% less capital than it was five years ago. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

On a side note, Qingdao Kingking Applied Chemistry's current liabilities have increased over the last five years to 57% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

Our Take On Qingdao Kingking Applied Chemistry's ROCE

In summary, it's unfortunate that Qingdao Kingking Applied Chemistry is shrinking its capital base and also generating lower returns. Investors haven't taken kindly to these developments, since the stock has declined 44% from where it was five years ago. 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 Qingdao Kingking Applied Chemistry and understanding them should be part of your investment process.

While Qingdao Kingking Applied Chemistry 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.