When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. 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 indicates the company is producing less profit from its investments and its total assets are decreasing. And from a first read, things don't look too good at Shanghai Beite Technology (SHSE:603009), so let's see why.
Understanding 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. To calculate this metric for Shanghai Beite Technology, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.026 = CN¥49m ÷ (CN¥3.4b - CN¥1.5b) (Based on the trailing twelve months to September 2023).
Therefore, Shanghai Beite Technology has an ROCE of 2.6%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 5.9%.
View our latest analysis for Shanghai Beite Technology
Historical performance is a great place to start when researching a stock so above you can see the gauge for Shanghai Beite Technology's ROCE against it's prior returns. If you're interested in investigating Shanghai Beite Technology's past further, check out this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
In terms of Shanghai Beite Technology's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 6.0%, 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. 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 Shanghai Beite Technology to turn into a multi-bagger.
On a side note, Shanghai Beite Technology's current liabilities are still rather high at 44% 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.
What We Can Learn From Shanghai Beite Technology's ROCE
All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. However the stock has delivered a 89% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Shanghai Beite Technology (of which 1 can't be ignored!) that 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.