To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This indicates the company is producing less profit from its investments and its total assets are decreasing. So after we looked into Tangshan Sanyou Chemical IndustriesLtd (SHSE:600409), the trends above didn't look too great.

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. To calculate this metric for Tangshan Sanyou Chemical IndustriesLtd, this is the formula:

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

0.066 = CN¥1.2b ÷ (CN¥27b - CN¥7.9b) (Based on the trailing twelve months to September 2023).

Therefore, Tangshan Sanyou Chemical IndustriesLtd has an ROCE of 6.6%. On its own that's a low return, but compared to the average of 5.5% generated by the Chemicals industry, it's much better.

View our latest analysis for Tangshan Sanyou Chemical IndustriesLtd

Above you can see how the current ROCE for Tangshan Sanyou Chemical IndustriesLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Tangshan Sanyou Chemical IndustriesLtd here for free.

So How Is Tangshan Sanyou Chemical IndustriesLtd's ROCE Trending?

There is reason to be cautious about Tangshan Sanyou Chemical IndustriesLtd, given the returns are trending downwards. About five years ago, returns on capital were 19%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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 Tangshan Sanyou Chemical IndustriesLtd becoming one if things continue as they have.

The Bottom Line On Tangshan Sanyou Chemical IndustriesLtd's ROCE

In summary, it's unfortunate that Tangshan Sanyou Chemical IndustriesLtd is generating lower returns from the same amount of capital. In spite of that, the stock has delivered a 5.3% return to shareholders who held over 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.

One more thing, we've spotted 2 warning signs facing Tangshan Sanyou Chemical IndustriesLtd that you might find interesting.

While Tangshan Sanyou Chemical IndustriesLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.