If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. On that note, looking into Hongli Zhihui GroupLtd (SZSE:300219), we weren't too upbeat about how things were going.

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. To calculate this metric for Hongli Zhihui GroupLtd, this is the formula:

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

0.071 = CN¥235m ÷ (CN¥5.4b - CN¥2.0b) (Based on the trailing twelve months to September 2023).

So, Hongli Zhihui GroupLtd has an ROCE of 7.1%. On its own that's a low return, but compared to the average of 4.2% generated by the Semiconductor industry, it's much better.

View our latest analysis for Hongli Zhihui GroupLtd

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

So How Is Hongli Zhihui GroupLtd's ROCE Trending?

We are a bit worried about the trend of returns on capital at Hongli Zhihui GroupLtd. Unfortunately the returns on capital have diminished from the 12% 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 Hongli Zhihui GroupLtd to turn into a multi-bagger.

What We Can Learn From Hongli Zhihui GroupLtd's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Investors must expect better things on the horizon though because the stock has risen 14% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Hongli Zhihui GroupLtd could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

While Hongli Zhihui GroupLtd 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.