The Returns On Capital At Ningbo Shuanglin Auto PartsLtd (SZSE:300100) Don't Inspire Confidence

What financial metrics can indicate to us that a company is maturing or even in decline? 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. So after glancing at the trends within Ningbo Shuanglin Auto PartsLtd (SZSE:300100), we weren't too hopeful.

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. Analysts use this formula to calculate it for Ningbo Shuanglin Auto PartsLtd:

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

0.066 = CN¥173m ÷ (CN¥5.5b - CN¥2.9b) (Based on the trailing twelve months to September 2023).

Therefore, Ningbo Shuanglin Auto PartsLtd has an ROCE of 6.6%. Even though it's in line with the industry average of 6.6%, it's still a low return by itself.

See our latest analysis for Ningbo Shuanglin Auto PartsLtd

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

What The Trend Of ROCE Can Tell Us

We aren't too thrilled by the trend because ROCE has declined 40% over the last five years and despite the capital raising conducted before the latest reports, the business has -39% less capital employed.

Another thing to note, Ningbo Shuanglin Auto PartsLtd has a high ratio of current liabilities to total assets of 52%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Ningbo Shuanglin Auto PartsLtd's ROCE

In summary, it's unfortunate that Ningbo Shuanglin Auto PartsLtd is shrinking its capital base and also generating lower returns. It should come as no surprise then that the stock has fallen 16% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Like most companies, Ningbo Shuanglin Auto PartsLtd does come with some risks, and we've found 2 warning signs that you should be aware of.

While Ningbo Shuanglin Auto PartsLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.