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. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates the company is producing less profit from its investments and its total assets are decreasing. Having said that, after a brief look, Spic Yuanda Environmental-ProtectionLtd (SHSE:600292) we aren't filled with optimism, but let's investigate further.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Spic Yuanda Environmental-ProtectionLtd is:

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

0.023 = CN¥149m ÷ (CN¥9.4b - CN¥2.8b) (Based on the trailing twelve months to June 2024).

Therefore, Spic Yuanda Environmental-ProtectionLtd has an ROCE of 2.3%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 5.6%.

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Spic Yuanda Environmental-ProtectionLtd's past further, check out this free graph covering Spic Yuanda Environmental-ProtectionLtd's past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of Spic Yuanda Environmental-ProtectionLtd's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 4.1%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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 Spic Yuanda Environmental-ProtectionLtd to turn into a multi-bagger.

Our Take On Spic Yuanda Environmental-ProtectionLtd's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. And long term shareholders have watched their investments stay flat over the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a final note, we've found 1 warning sign for Spic Yuanda Environmental-ProtectionLtd that we think you should be aware of.

While Spic Yuanda Environmental-ProtectionLtd 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.