Returns On Capital At Zhejiang Dehong Automotive Electronic & Electrical (SHSE:603701) Paint A Concerning Picture

What underlying fundamental trends can indicate that a company might be in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. Having said that, after a brief look, Zhejiang Dehong Automotive Electronic & Electrical (SHSE:603701) we aren't filled with optimism, but let's investigate further.

What Is 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. Analysts use this formula to calculate it for Zhejiang Dehong Automotive Electronic & Electrical:

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

0.013 = CN¥11m ÷ (CN¥1.1b - CN¥287m) (Based on the trailing twelve months to June 2024).

Thus, Zhejiang Dehong Automotive Electronic & Electrical has an ROCE of 1.3%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 7.3%.

Check out our latest analysis for Zhejiang Dehong Automotive Electronic & Electrical

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zhejiang Dehong Automotive Electronic & Electrical's ROCE against it's prior returns. If you'd like to look at how Zhejiang Dehong Automotive Electronic & Electrical has performed in the past in other metrics, you can view this free graph of Zhejiang Dehong Automotive Electronic & Electrical's past earnings, revenue and cash flow.

So How Is Zhejiang Dehong Automotive Electronic & Electrical's ROCE Trending?

We are a bit worried about the trend of returns on capital at Zhejiang Dehong Automotive Electronic & Electrical. Unfortunately the returns on capital have diminished from the 6.6% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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 Zhejiang Dehong Automotive Electronic & Electrical becoming one if things continue as they have.

In Conclusion...

In summary, it's unfortunate that Zhejiang Dehong Automotive Electronic & Electrical is generating lower returns from the same amount of capital. Yet despite these concerning fundamentals, the stock has performed strongly with a 65% return over the last five years, so investors appear very optimistic. 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 Zhejiang Dehong Automotive Electronic & Electrical (1 shouldn't be ignored) you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.