Returns On Capital Signal Difficult Times Ahead For Shandong Longji MachineryLtd (SZSE:002363)

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. And from a first read, things don't look too good at Shandong Longji MachineryLtd (SZSE:002363), so let's see why.

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. Analysts use this formula to calculate it for Shandong Longji MachineryLtd:

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

0.0088 = CN¥20m ÷ (CN¥3.4b - CN¥1.2b) (Based on the trailing twelve months to September 2023).

So, Shandong Longji MachineryLtd has an ROCE of 0.9%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 6.6%.

View our latest analysis for Shandong Longji MachineryLtd

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

So How Is Shandong Longji MachineryLtd's ROCE Trending?

In terms of Shandong Longji MachineryLtd's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 3.5% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Shandong Longji MachineryLtd becoming one if things continue as they have.

The Key Takeaway

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. Despite the concerning underlying trends, the stock has actually gained 31% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

One more thing: We've identified 3 warning signs with Shandong Longji MachineryLtd (at least 1 which is significant) , and understanding them would certainly be useful.

While Shandong Longji MachineryLtd 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.

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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.