Be Wary Of Changchun Yidong ClutchLTD (SHSE:600148) And Its Returns On Capital

What financial metrics can indicate to us that a company is maturing or even in decline? 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 glancing at the trends within Changchun Yidong ClutchLTD (SHSE:600148), we weren't too hopeful.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Changchun Yidong ClutchLTD, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.015 = CN¥10m ÷ (CN¥1.2b - CN¥571m) (Based on the trailing twelve months to September 2024).

Therefore, Changchun Yidong ClutchLTD has an ROCE of 1.5%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 7.0%.

See our latest analysis for Changchun Yidong ClutchLTD

Historical performance is a great place to start when researching a stock so above you can see the gauge for Changchun Yidong ClutchLTD's ROCE against it's prior returns. If you're interested in investigating Changchun Yidong ClutchLTD's past further, check out this free graph covering Changchun Yidong ClutchLTD's past earnings, revenue and cash flow.

How Are Returns Trending?

We are a bit worried about the trend of returns on capital at Changchun Yidong ClutchLTD. About five years ago, returns on capital were 9.1%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Changchun Yidong ClutchLTD becoming one if things continue as they have.

Another thing to note, Changchun Yidong ClutchLTD has a high ratio of current liabilities to total assets of 46%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Changchun Yidong ClutchLTD'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. However the stock has delivered a 75% 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.

On a final note, we found 2 warning signs for Changchun Yidong ClutchLTD (1 makes us a bit uncomfortable) you should be aware of.

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.