Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? 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. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. And from a first read, things don't look too good at Ningbo Fuda (SHSE:600724), so let's see why.

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 Ningbo Fuda:

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

0.082 = CN¥301m ÷ (CN¥4.5b - CN¥889m) (Based on the trailing twelve months to March 2023).

Thus, Ningbo Fuda has an ROCE of 8.2%. In absolute terms, that's a low return but it's around the Basic Materials industry average of 7.3%.

View our latest analysis for Ningbo Fuda

Historical performance is a great place to start when researching a stock so above you can see the gauge for Ningbo Fuda's ROCE against it's prior returns. If you're interested in investigating Ningbo Fuda's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of Ningbo Fuda's historical ROCE trend, it isn't fantastic. To be more specific, today's ROCE was 11% five years ago but has since fallen to 8.2%. On top of that, the business is utilizing 46% less capital within its operations. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.

On a side note, Ningbo Fuda has done well to pay down its current liabilities to 20% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. In spite of that, the stock has delivered a 6.5% return to shareholders who held over the last three years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with Ningbo Fuda (including 2 which are concerning) .

While Ningbo Fuda 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.