What financial metrics can indicate to us that a company is maturing or even 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. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. And from a first read, things don't look too good at Wenfeng Great World Chain Development (SHSE:601010), so let's see why.

What Is 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. Analysts use this formula to calculate it for Wenfeng Great World Chain Development:

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

0.042 = CN¥189m ÷ (CN¥6.3b - CN¥1.8b) (Based on the trailing twelve months to September 2024).

So, Wenfeng Great World Chain Development has an ROCE of 4.2%. Even though it's in line with the industry average of 3.9%, it's still a low return by itself.

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 Wenfeng Great World Chain Development's past further, check out this free graph covering Wenfeng Great World Chain Development's past earnings, revenue and cash flow.

What Can We Tell From Wenfeng Great World Chain Development's ROCE Trend?

There is reason to be cautious about Wenfeng Great World Chain Development, given the returns are trending downwards. About five years ago, returns on capital were 7.9%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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 Wenfeng Great World Chain Development to turn into a multi-bagger.

The Bottom Line On Wenfeng Great World Chain Development's ROCE

In summary, it's unfortunate that Wenfeng Great World Chain Development is generating lower returns from the same amount of capital. And long term shareholders have watched their investments stay flat over the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Like most companies, Wenfeng Great World Chain Development does come with some risks, and we've found 2 warning signs that you should be aware of.

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.