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. 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. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after glancing at the trends within Gansu Guofang Industry & Trade (Group) (SHSE:601086), we weren't too hopeful.

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 Gansu Guofang Industry & Trade (Group), this is the formula:

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

0.049 = CN¥91m ÷ (CN¥2.6b - CN¥771m) (Based on the trailing twelve months to September 2024).

Therefore, Gansu Guofang Industry & Trade (Group) has an ROCE of 4.9%. On its own that's a low return, but compared to the average of 3.9% generated by the Multiline Retail industry, it's much better.

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 Gansu Guofang Industry & Trade (Group)'s past further, check out this free graph covering Gansu Guofang Industry & Trade (Group)'s past earnings, revenue and cash flow.

What Can We Tell From Gansu Guofang Industry & Trade (Group)'s ROCE Trend?

There is reason to be cautious about Gansu Guofang Industry & Trade (Group), given the returns are trending downwards. About five years ago, returns on capital were 8.0%, 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 Gansu Guofang Industry & Trade (Group) to turn into a multi-bagger.

What We Can Learn From Gansu Guofang Industry & Trade (Group)'s ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Despite the concerning underlying trends, the stock has actually gained 38% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

One more thing: We've identified 4 warning signs with Gansu Guofang Industry & Trade (Group) (at least 1 which is potentially serious) , and understanding these would certainly be useful.

While Gansu Guofang Industry & Trade (Group) 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.