These Return Metrics Don't Make GuangDong PaiSheng Intelligent TechnologyLtd (SZSE:300176) Look Too Strong

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. 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. 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 GuangDong PaiSheng Intelligent TechnologyLtd (SZSE:300176), so let's see why.

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 GuangDong PaiSheng Intelligent TechnologyLtd:

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

0.049 = CN¥47m ÷ (CN¥2.1b - CN¥1.1b) (Based on the trailing twelve months to March 2024).

So, GuangDong PaiSheng Intelligent TechnologyLtd has an ROCE of 4.9%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 6.9%.

Check out our latest analysis for GuangDong PaiSheng Intelligent TechnologyLtd

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'd like to look at how GuangDong PaiSheng Intelligent TechnologyLtd has performed in the past in other metrics, you can view this free graph of GuangDong PaiSheng Intelligent TechnologyLtd's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

The trend of returns that GuangDong PaiSheng Intelligent TechnologyLtd is generating are raising some concerns. Unfortunately, returns have declined substantially over the last five years to the 4.9% we see today. In addition to that, GuangDong PaiSheng Intelligent TechnologyLtd is now employing 36% 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. If these underlying trends continue, we wouldn't be too optimistic going forward.

Another thing to note, GuangDong PaiSheng Intelligent TechnologyLtd has a high ratio of current liabilities to total assets of 54%. 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.

In Conclusion...

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. Investors haven't taken kindly to these developments, since the stock has declined 60% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

GuangDong PaiSheng Intelligent TechnologyLtd does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

While GuangDong PaiSheng Intelligent TechnologyLtd 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.

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