What financial metrics can indicate to us that a company is maturing or even in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after we looked into Long Yuan Construction Group (SHSE:600491), the trends above didn't look too great.

Understanding 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 Long Yuan Construction Group:

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

0.04 = CN¥1.2b ÷ (CN¥56b - CN¥26b) (Based on the trailing twelve months to September 2024).

So, Long Yuan Construction Group has an ROCE of 4.0%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 6.2%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Long Yuan Construction Group's ROCE against it's prior returns. If you'd like to look at how Long Yuan Construction Group has performed in the past in other metrics, you can view this free graph of Long Yuan Construction Group's past earnings, revenue and cash flow.

What Does the ROCE Trend For Long Yuan Construction Group Tell Us?

We are a bit worried about the trend of returns on capital at Long Yuan Construction Group. Unfortunately the returns on capital have diminished from the 5.0% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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. If these trends continue, we wouldn't expect Long Yuan Construction Group to turn into a multi-bagger.

Another thing to note, Long Yuan Construction Group has a high ratio of current liabilities to total assets of 48%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

In summary, it's unfortunate that Long Yuan Construction Group is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 42% 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.

On a final note, we've found 2 warning signs for Long Yuan Construction Group that we think 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.