Zhejiang Chang'an Renheng Technology (HKG:8139) Will Be Looking To Turn Around Its Returns

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. 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. 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. And from a first read, things don't look too good at Zhejiang Chang'an Renheng Technology (HKG:8139), so let's see why.

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Understanding Return On Capital Employed (ROCE)

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 Zhejiang Chang'an Renheng Technology is:

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

0.031 = CN¥4.0m ÷ (CN¥345m - CN¥215m) (Based on the trailing twelve months to June 2025).

Therefore, Zhejiang Chang'an Renheng Technology has an ROCE of 3.1%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 8.5%.

Check out our latest analysis for Zhejiang Chang'an Renheng Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zhejiang Chang'an Renheng Technology's ROCE against it's prior returns. If you're interested in investigating Zhejiang Chang'an Renheng Technology's past further, check out this free graph covering Zhejiang Chang'an Renheng Technology's past earnings, revenue and cash flow.

What Can We Tell From Zhejiang Chang'an Renheng Technology's ROCE Trend?

We are a bit worried about the trend of returns on capital at Zhejiang Chang'an Renheng Technology. Unfortunately the returns on capital have diminished from the 5.5% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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 Zhejiang Chang'an Renheng Technology to turn into a multi-bagger.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 62%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 3.1%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

Our Take On Zhejiang Chang'an Renheng Technology's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. It should come as no surprise then that the stock has fallen 42% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing, we've spotted 3 warning signs facing Zhejiang Chang'an Renheng Technology that you might find interesting.

While Zhejiang Chang'an Renheng Technology 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.