When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. And from a first read, things don't look too good at Ningbo Ligong Environment And Energy TechnologyLtd (SZSE:002322), so let's see why.

What Is 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. To calculate this metric for Ningbo Ligong Environment And Energy TechnologyLtd, this is the formula:

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

0.084 = CN¥270m ÷ (CN¥3.5b - CN¥319m) (Based on the trailing twelve months to March 2024).

So, Ningbo Ligong Environment And Energy TechnologyLtd has an ROCE of 8.4%. In absolute terms, that's a low return, but it's much better than the Electrical industry average of 6.0%.

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

What Can We Tell From Ningbo Ligong Environment And Energy TechnologyLtd's ROCE Trend?

In terms of Ningbo Ligong Environment And Energy TechnologyLtd's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 11%, 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. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Ningbo Ligong Environment And Energy TechnologyLtd to turn into a multi-bagger.

What We Can Learn From Ningbo Ligong Environment And Energy TechnologyLtd's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. However the stock has delivered a 44% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Ningbo Ligong Environment And Energy TechnologyLtd does have some risks, we noticed 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

While Ningbo Ligong Environment And Energy TechnologyLtd 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.