Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? 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. So after we looked into Wuxi Taiji Industry Limited (SHSE:600667), the trends above didn't look too great.
Understanding 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. To calculate this metric for Wuxi Taiji Industry Limited, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.065 = CN¥684m ÷ (CN¥31b - CN¥20b) (Based on the trailing twelve months to September 2023).
So, Wuxi Taiji Industry Limited has an ROCE of 6.5%. On its own that's a low return, but compared to the average of 4.2% generated by the Semiconductor industry, it's much better.
See our latest analysis for Wuxi Taiji Industry Limited
Above you can see how the current ROCE for Wuxi Taiji Industry Limited compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
So How Is Wuxi Taiji Industry Limited's ROCE Trending?
In terms of Wuxi Taiji Industry Limited's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 9.4%, however they're now substantially lower than that as we saw above. 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 Wuxi Taiji Industry Limited to turn into a multi-bagger.
On a side note, Wuxi Taiji Industry Limited's current liabilities have increased over the last five years to 66% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 6.5%. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.
Our Take On Wuxi Taiji Industry Limited'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. In spite of that, the stock has delivered a 35% 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.
Wuxi Taiji Industry Limited could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.
While Wuxi Taiji Industry Limited 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.