Wuxi Honghui New Materials Technology (SZSE:002802) Will Be Hoping To Turn Its Returns On Capital Around

What underlying fundamental trends can indicate that a company might be in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. Having said that, after a brief look, Wuxi Honghui New Materials Technology (SZSE:002802) we aren't filled with optimism, but let's investigate further.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Wuxi Honghui New Materials Technology is:

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

0.085 = CN¥54m ÷ (CN¥704m - CN¥62m) (Based on the trailing twelve months to September 2024).

Thus, Wuxi Honghui New Materials Technology has an ROCE of 8.5%. On its own that's a low return, but compared to the average of 5.4% generated by the Chemicals industry, it's much better.

Check out our latest analysis for Wuxi Honghui New Materials Technology

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 Wuxi Honghui New Materials Technology's past further, check out this free graph covering Wuxi Honghui New Materials Technology's past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of Wuxi Honghui New Materials Technology's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 14% five years ago, but since then it has dropped noticeably. 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 Wuxi Honghui New Materials Technology to turn into a multi-bagger.

Our Take On Wuxi Honghui New Materials Technology's ROCE

In summary, it's unfortunate that Wuxi Honghui New Materials Technology is generating lower returns from the same amount of capital. In spite of that, the stock has delivered a 37% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you'd like to know more about Wuxi Honghui New Materials Technology, we've spotted 2 warning signs, and 1 of them doesn't sit too well with us.

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.