If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? 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 reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. Having said that, after a brief look, North Huajin Chemical IndustriesLtd (SZSE:000059) we aren't filled with optimism, but let's investigate further.

Return On Capital Employed (ROCE): What Is It?

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 North Huajin Chemical IndustriesLtd is:

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

0.0067 = CN¥160m ÷ (CN¥28b - CN¥4.2b) (Based on the trailing twelve months to June 2024).

Thus, North Huajin Chemical IndustriesLtd has an ROCE of 0.7%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 5.5%.

In the above chart we have measured North Huajin Chemical IndustriesLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for North Huajin Chemical IndustriesLtd .

So How Is North Huajin Chemical IndustriesLtd's ROCE Trending?

We are a bit worried about the trend of returns on capital at North Huajin Chemical IndustriesLtd. Unfortunately the returns on capital have diminished from the 7.9% 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. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect North Huajin Chemical IndustriesLtd to turn into a multi-bagger.

Our Take On North Huajin Chemical IndustriesLtd's ROCE

In summary, it's unfortunate that North Huajin Chemical IndustriesLtd is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 14% 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.

If you want to continue researching North Huajin Chemical IndustriesLtd, you might be interested to know about the 1 warning sign that our analysis has discovered.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.