If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? 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. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. In light of that, from a first glance at Changshu Tianyin ElectromechanicalLtd (SZSE:300342), we've spotted some signs that it could be struggling, so let's investigate.
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. To calculate this metric for Changshu Tianyin ElectromechanicalLtd, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.021 = CN¥33m ÷ (CN¥2.1b - CN¥543m) (Based on the trailing twelve months to September 2023).
Therefore, Changshu Tianyin ElectromechanicalLtd has an ROCE of 2.1%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 6.3%.
See our latest analysis for Changshu Tianyin ElectromechanicalLtd
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 want to delve into the historical earnings, revenue and cash flow of Changshu Tianyin ElectromechanicalLtd, check out these free graphs here.
What Can We Tell From Changshu Tianyin ElectromechanicalLtd's ROCE Trend?
There is reason to be cautious about Changshu Tianyin ElectromechanicalLtd, given the returns are trending downwards. About five years ago, returns on capital were 12%, 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. 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 Changshu Tianyin ElectromechanicalLtd to turn into a multi-bagger.
What We Can Learn From Changshu Tianyin ElectromechanicalLtd'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 81% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.
One final note, you should learn about the 4 warning signs we've spotted with Changshu Tianyin ElectromechanicalLtd (including 2 which are significant) .
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.