Be Wary Of Songz Automobile Air Conditioning (SZSE:002454) And Its Returns On Capital

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. Having said that, after a brief look, Songz Automobile Air Conditioning (SZSE:002454) we aren't filled with optimism, but let's investigate further.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Songz Automobile Air Conditioning:

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

0.028 = CN¥128m ÷ (CN¥7.3b - CN¥2.8b) (Based on the trailing twelve months to March 2024).

Therefore, Songz Automobile Air Conditioning has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 6.9%.

View our latest analysis for Songz Automobile Air Conditioning

In the above chart we have measured Songz Automobile Air Conditioning's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Songz Automobile Air Conditioning for free.

So How Is Songz Automobile Air Conditioning's ROCE Trending?

We are a bit worried about the trend of returns on capital at Songz Automobile Air Conditioning. About five years ago, returns on capital were 4.0%, 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. 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. If these trends continue, we wouldn't expect Songz Automobile Air Conditioning to turn into a multi-bagger.

In Conclusion...

In summary, it's unfortunate that Songz Automobile Air Conditioning is generating lower returns from the same amount of capital. Despite the concerning underlying trends, the stock has actually gained 8.6% 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.

On a separate note, we've found 1 warning sign for Songz Automobile Air Conditioning you'll probably want to know about.

While Songz Automobile Air Conditioning 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.