Some Investors May Be Worried About Zhongtong Bus HoldingLTD's (SZSE:000957) Returns On Capital

What financial metrics can indicate to us that a company is maturing or even in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. On that note, looking into Zhongtong Bus HoldingLTD (SZSE:000957), we weren't too upbeat about how things were going.

What Is 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. The formula for this calculation on Zhongtong Bus HoldingLTD is:

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

0.038 = CN¥124m ÷ (CN¥8.4b - CN¥5.1b) (Based on the trailing twelve months to June 2024).

Therefore, Zhongtong Bus HoldingLTD has an ROCE of 3.8%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.5%.

Check out our latest analysis for Zhongtong Bus HoldingLTD

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 Zhongtong Bus HoldingLTD has performed in the past in other metrics, you can view this free graph of Zhongtong Bus HoldingLTD's past earnings, revenue and cash flow.

What Can We Tell From Zhongtong Bus HoldingLTD's ROCE Trend?

We are a bit worried about the trend of returns on capital at Zhongtong Bus HoldingLTD. About five years ago, returns on capital were 6.4%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Zhongtong Bus HoldingLTD becoming one if things continue as they have.

On a side note, Zhongtong Bus HoldingLTD's current liabilities are still rather high at 61% of total assets. 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 the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 65% return. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Zhongtong Bus HoldingLTD does have some risks though, and we've spotted 1 warning sign for Zhongtong Bus HoldingLTD that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.