What underlying fundamental trends can indicate that a company might be in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. In light of that, from a first glance at Zhongtong Bus Holding (SZSE:000957), we've spotted some signs that it could be struggling, so let's investigate.
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 Zhongtong Bus Holding is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.049 = CN¥153m ÷ (CN¥8.6b - CN¥5.4b) (Based on the trailing twelve months to June 2023).
Therefore, Zhongtong Bus Holding has an ROCE of 4.9%. Ultimately, that's a low return and it under-performs the Machinery industry average of 6.4%.
View our latest analysis for Zhongtong Bus Holding
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 Zhongtong Bus Holding's past further, check out this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
The trend of returns that Zhongtong Bus Holding is generating are raising some concerns. Unfortunately, returns have declined substantially over the last five years to the 4.9% we see today. On top of that, the business is utilizing 24% less capital within its operations. The fact that both are shrinking is an indication that the business is going through some tough times. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.
On a side note, Zhongtong Bus Holding's current liabilities are still rather high at 63% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Bottom Line On Zhongtong Bus Holding's ROCE
In summary, it's unfortunate that Zhongtong Bus Holding is shrinking its capital base and also generating lower returns. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 131%. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.
Zhongtong Bus Holding 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.