When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. 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. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. In light of that, from a first glance at Suzhou Gold Mantis Construction Decoration (SZSE:002081), we've spotted some signs that it could be struggling, so let's investigate.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Suzhou Gold Mantis Construction Decoration is:

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

0.078 = CN¥1.1b ÷ (CN¥34b - CN¥19b) (Based on the trailing twelve months to March 2024).

Therefore, Suzhou Gold Mantis Construction Decoration has an ROCE of 7.8%. In absolute terms, that's a low return but it's around the Construction industry average of 6.6%.

Above you can see how the current ROCE for Suzhou Gold Mantis Construction Decoration compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Suzhou Gold Mantis Construction Decoration .

How Are Returns Trending?

We are a bit worried about the trend of returns on capital at Suzhou Gold Mantis Construction Decoration. Unfortunately the returns on capital have diminished from the 19% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Suzhou Gold Mantis Construction Decoration becoming one if things continue as they have.

Another thing to note, Suzhou Gold Mantis Construction Decoration has a high ratio of current liabilities to total assets of 57%. 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.

Our Take On Suzhou Gold Mantis Construction Decoration's ROCE

In summary, it's unfortunate that Suzhou Gold Mantis Construction Decoration is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last five years have experienced a 60% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you want to continue researching Suzhou Gold Mantis Construction Decoration, you might be interested to know about the 1 warning sign that our analysis has discovered.

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.