Zhejiang Meilun Elevator (SHSE:603321) Could Be Struggling To Allocate Capital

What underlying fundamental trends can indicate that a company might be in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. And from a first read, things don't look too good at Zhejiang Meilun Elevator (SHSE:603321), so let's see why.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Zhejiang Meilun Elevator is:

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

0.025 = CN¥29m ÷ (CN¥2.1b - CN¥873m) (Based on the trailing twelve months to September 2023).

Thus, Zhejiang Meilun Elevator has an ROCE of 2.5%. Ultimately, that's a low return and it under-performs the Machinery industry average of 6.0%.

Check out our latest analysis for Zhejiang Meilun Elevator

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're interested in investigating Zhejiang Meilun Elevator's past further, check out this free graph covering Zhejiang Meilun Elevator's past earnings, revenue and cash flow.

So How Is Zhejiang Meilun Elevator's ROCE Trending?

In terms of Zhejiang Meilun Elevator's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 3.8%, 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. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Zhejiang Meilun Elevator becoming one if things continue as they have.

On a separate but related note, it's important to know that Zhejiang Meilun Elevator has a current liabilities to total assets ratio of 42%, which we'd consider pretty high. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Zhejiang Meilun Elevator's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Long term shareholders who've owned the stock over the last five years have experienced a 28% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Zhejiang Meilun Elevator does have some risks though, and we've spotted 1 warning sign for Zhejiang Meilun Elevator that you might be interested in.

While Zhejiang Meilun Elevator 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.