Wuxi Lihu's (SZSE:300694) Returns On Capital Tell Us There Is Reason To Feel Uneasy

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. And from a first read, things don't look too good at Wuxi Lihu (SZSE:300694), 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 Wuxi Lihu:

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

0.047 = CN¥68m ÷ (CN¥2.1b - CN¥641m) (Based on the trailing twelve months to September 2024).

Therefore, Wuxi Lihu has an ROCE of 4.7%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 7.0%.

See our latest analysis for Wuxi Lihu

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

So How Is Wuxi Lihu's ROCE Trending?

In terms of Wuxi Lihu's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 9.9%, 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 Wuxi Lihu to turn into a multi-bagger.

The Bottom Line On Wuxi Lihu's ROCE

In summary, it's unfortunate that Wuxi Lihu is generating lower returns from the same amount of capital. Despite the concerning underlying trends, the stock has actually gained 18% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Wuxi Lihu does have some risks, we noticed 3 warning signs (and 2 which don't sit too well with us) we think you should know about.

While Wuxi Lihu 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.