Returns On Capital Signal Difficult Times Ahead For Greatoo Intelligent Equipment (SZSE:002031)

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. 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 we looked into Greatoo Intelligent Equipment (SZSE:002031), the trends above didn't look too great.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Greatoo Intelligent Equipment, this is the formula:

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

0.0068 = CN¥20m ÷ (CN¥4.4b - CN¥1.4b) (Based on the trailing twelve months to September 2024).

So, Greatoo Intelligent Equipment has an ROCE of 0.7%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 7.0%.

View our latest analysis for Greatoo Intelligent Equipment

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 Greatoo Intelligent Equipment's past further, check out this free graph covering Greatoo Intelligent Equipment's past earnings, revenue and cash flow.

What Does the ROCE Trend For Greatoo Intelligent Equipment Tell Us?

The trend of returns that Greatoo Intelligent Equipment is generating are raising some concerns. Unfortunately, returns have declined substantially over the last five years to the 0.7% we see today. In addition to that, Greatoo Intelligent Equipment is now employing 26% less capital than it was five years ago. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

Our Take On Greatoo Intelligent Equipment's ROCE

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. Yet despite these poor fundamentals, the stock has gained a huge 234% 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.

Greatoo Intelligent Equipment does have some risks though, and we've spotted 3 warning signs for Greatoo Intelligent Equipment that you might be interested in.

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.