Returns On Capital At Shanghai CarthaneLtd (SHSE:603037) Paint A Concerning Picture

What underlying fundamental trends can indicate that a company might be in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after glancing at the trends within Shanghai CarthaneLtd (SHSE:603037), we weren't too hopeful.

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. The formula for this calculation on Shanghai CarthaneLtd is:

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

0.091 = CN¥88m ÷ (CN¥1.2b - CN¥256m) (Based on the trailing twelve months to March 2024).

So, Shanghai CarthaneLtd has an ROCE of 9.1%. On its own that's a low return, but compared to the average of 6.9% generated by the Auto Components industry, it's much better.

Check out our latest analysis for Shanghai CarthaneLtd

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're interested in investigating Shanghai CarthaneLtd's past further, check out this free graph covering Shanghai CarthaneLtd's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of Shanghai CarthaneLtd's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 13% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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 Shanghai CarthaneLtd to turn into a multi-bagger.

Our Take On Shanghai CarthaneLtd's ROCE

In summary, it's unfortunate that Shanghai CarthaneLtd is generating lower returns from the same amount of capital. However the stock has delivered a 60% 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.

If you want to know some of the risks facing Shanghai CarthaneLtd we've found 3 warning signs (1 is significant!) that you should be aware of before investing here.

While Shanghai CarthaneLtd 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com