When we research a company, it can sometimes be hard to spot warning signs, but there are some financial indicators that can help spot problems early.Potentially declining businesses usually show two trends, a return capital employed (ROCE) is declining, and according to Capital employed is also down. This suggests that the company is not increasing shareholder wealth because returns are falling and its net asset base is shrinking.In view of this, at first glance Zhejiang Chang’an Renheng Technology (HKG:8139), we found some signs that it might be struggling, so let’s investigate.
Understanding Return on Capital Employed (ROCE)
For those who aren’t sure what ROCE is, it measures the amount of pre-tax profit a company can generate from the capital employed in its business. The calculation formula of Zhejiang Changan Renheng Technology is as follows:
Return on Capital Employed = Earnings Before Interest and Taxes (EBIT) ÷ (Total Assets – Current Liabilities)
0.026 = RMB 3 million ÷ (RMB 279 million – RMB 164 million) (Based on last twelve months to September 2022).
so, Zhejiang Chang’an Renheng Technology has an ROCE of 2.6%. At the end of the day, this is a low rate of return, below the 15% average in the chemical industry.
View our latest analysis for Zhejiang Changan Renheng Technology
Historical performance is a good starting point when researching stocks, so above you can see how Zhejiang Changan Renheng Technology’s ROCE compares to its prior returns.If you want to dig deeper into Zhejiang Changan Renheng Technology’s historical earnings, revenue and cash flow, check these out free Chart here.
From the ROCE trend of Zhejiang Changan Renheng Technology, what can we see?
We are a bit concerned about the capital return trend of Zhejiang Changan Renheng Technology. More specifically, the ROCE five years ago was 5.0%, but it has declined significantly since then. Most importantly, it is worth noting that the amount of capital employed within businesses has remained relatively constant. This combination may indicate that a mature business still has areas to deploy capital, but the returns are not high due to the possibility of new competition or declining profit margins. If these trends continue, we do not expect Zhejiang Changan Renheng Technology to become a diversified company.
Incidentally, Zhejiang Changan Renheng Technology’s current liabilities have increased to 59% of total assets in the past five years, effectively distorting ROCE to a certain extent. ROCE could actually be lower if current liabilities hadn’t increased that much. This means that in practice, a significant portion of the business is financed by the company’s suppliers or short-term creditors etc., which in itself poses some risks.
The ROCE of Zhejiang Changan Renheng Technology is worth learning from
Finally, a trend of lower returns on capital for the same amount is usually not a sign that we’re looking for a growth stock. Investors haven’t taken kindly to these developments, as the stock is down 70% from five years ago. Since the underlying trends in these areas aren’t great, we’ll consider looking elsewhere.
If you want to continue to study Zhejiang Changan Renheng Technology, you may be interested in knowing 2 warning signs Our analysis has found.
Although the rate of return of Zhejiang Changan Renheng Technology is not the highest, look at this free List of companies with strong balance sheets and high returns on equity.
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find out if Zhejiang Chang’an Renheng Technology It may be overvalued or undervalued by viewing our comprehensive analysis, which includes Fair value estimates, risks and caveats, dividends, insider trading and financial health.
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This article by Simply Wall St is general in nature. We use only an unbiased methodology to provide reviews based on historical data and analyst forecasts, 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 into account your objectives or your financial situation. Our goal is to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no positions in any of the stocks mentioned.