What financial metrics can indicate to us that a company is maturing or even in decline? 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. This indicates the company is producing less profit from its investments and its total assets are decreasing. On that note, looking into Anhui Great Wall Military Industry (SHSE:601606), we weren't too upbeat about how things were going.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Anhui Great Wall Military Industry:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.013 = CN¥38m ÷ (CN¥4.3b - CN¥1.3b) (Based on the trailing twelve months to September 2023).
Therefore, Anhui Great Wall Military Industry has an ROCE of 1.3%. Ultimately, that's a low return and it under-performs the Aerospace & Defense industry average of 5.4%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Anhui Great Wall Military Industry's ROCE against it's prior returns. If you're interested in investigating Anhui Great Wall Military Industry's past further, check out this free graph covering Anhui Great Wall Military Industry's past earnings, revenue and cash flow.
So How Is Anhui Great Wall Military Industry's ROCE Trending?
In terms of Anhui Great Wall Military Industry's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 5.5% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Anhui Great Wall Military Industry to turn into a multi-bagger.
The Bottom Line
In summary, it's unfortunate that Anhui Great Wall Military Industry is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last five years have experienced a 42% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.
Like most companies, Anhui Great Wall Military Industry does come with some risks, and we've found 1 warning sign that you should be aware of.
While Anhui Great Wall Military Industry isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.