Tianjin Motor DiesLtd (SZSE:002510) Will Be Hoping To Turn Its Returns On Capital Around

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base 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. On that note, looking into Tianjin Motor DiesLtd (SZSE:002510), we weren't too upbeat about how things were going.

Understanding Return On Capital Employed (ROCE)

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 Tianjin Motor DiesLtd, this is the formula:

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

0.031 = CN¥100m ÷ (CN¥6.0b - CN¥2.8b) (Based on the trailing twelve months to September 2024).

Therefore, Tianjin Motor DiesLtd has an ROCE of 3.1%. 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 Tianjin Motor DiesLtd

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

What Does the ROCE Trend For Tianjin Motor DiesLtd Tell Us?

We are a bit worried about the trend of returns on capital at Tianjin Motor DiesLtd. To be more specific, the ROCE was 4.7% 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. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Tianjin Motor DiesLtd to turn into a multi-bagger.

Another thing to note, Tianjin Motor DiesLtd has a high ratio of current liabilities to total assets of 46%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Yet despite these concerning fundamentals, the stock has performed strongly with a 64% 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.

If you're still interested in Tianjin Motor DiesLtd it's worth checking out our FREE intrinsic value approximation for 002510 to see if it's trading at an attractive price in other respects.

While Tianjin Motor DiesLtd 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.