When researching a stock for investment, what can tell us that the company is in decline? 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 Fujian Qingshan Paper Industry (SHSE:600103), we weren't too hopeful.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Fujian Qingshan Paper Industry is:

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

0.016 = CN¥71m ÷ (CN¥5.8b - CN¥1.4b) (Based on the trailing twelve months to September 2023).

So, Fujian Qingshan Paper Industry has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Forestry industry average of 3.4%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Fujian Qingshan Paper Industry's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Fujian Qingshan Paper Industry, check out these free graphs here.

The Trend Of ROCE

There is reason to be cautious about Fujian Qingshan Paper Industry, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 4.9% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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 Fujian Qingshan Paper Industry to turn into a multi-bagger.

What We Can Learn From Fujian Qingshan Paper Industry's ROCE

In summary, it's unfortunate that Fujian Qingshan Paper Industry is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 11% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with Fujian Qingshan Paper Industry (including 1 which is significant) .

While Fujian Qingshan Paper Industry 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.