What financial metrics can indicate to us that a company is maturing or even in decline? 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. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after we looked into Lanzhou Lishang Guochao Industrial GroupLtd (SHSE:600738), the trends above didn't look too great.

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 Lanzhou Lishang Guochao Industrial GroupLtd:

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

0.09 = CN¥224m ÷ (CN¥3.4b - CN¥954m) (Based on the trailing twelve months to September 2024).

So, Lanzhou Lishang Guochao Industrial GroupLtd has an ROCE of 9.0%. 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.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Lanzhou Lishang Guochao Industrial GroupLtd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Lanzhou Lishang Guochao Industrial GroupLtd.

What Does the ROCE Trend For Lanzhou Lishang Guochao Industrial GroupLtd Tell Us?

We are a bit worried about the trend of returns on capital at Lanzhou Lishang Guochao Industrial GroupLtd. To be more specific, the ROCE was 12% five years ago, but since then it has dropped noticeably. 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 Lanzhou Lishang Guochao Industrial GroupLtd to turn into a multi-bagger.

On a side note, Lanzhou Lishang Guochao Industrial GroupLtd has done well to pay down its current liabilities to 28% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On Lanzhou Lishang Guochao Industrial GroupLtd's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Investors haven't taken kindly to these developments, since the stock has declined 19% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Lanzhou Lishang Guochao Industrial GroupLtd does have some risks, we noticed 2 warning signs (and 1 which is potentially serious) we think you should know about.

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.