Zhongtong Bus HoldingLTD (SZSE:000957) Is Finding It Tricky To Allocate Its Capital

What underlying fundamental trends can indicate that a company might be 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 the company is producing less profit from its investments and its total assets are decreasing. 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 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 Zhongtong Bus HoldingLTD is:

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

0.017 = CN¥55m ÷ (CN¥8.9b - CN¥5.7b) (Based on the trailing twelve months to March 2024).

So, Zhongtong Bus HoldingLTD has an ROCE of 1.7%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.6%.

See our latest analysis for Zhongtong Bus HoldingLTD

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zhongtong Bus HoldingLTD's ROCE against it's prior returns. 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 The Trend Of ROCE Can Tell Us

The trend of returns that Zhongtong Bus HoldingLTD is generating are raising some concerns. The company used to generate 5.3% on its capital five years ago but it has since fallen noticeably. On top of that, the business is utilizing 30% less capital within its operations. 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.

On a separate but related note, it's important to know that Zhongtong Bus HoldingLTD has a current liabilities to total assets ratio of 64%, which we'd consider pretty high. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Zhongtong Bus HoldingLTD's ROCE

To see Zhongtong Bus HoldingLTD reducing the capital employed in the business in tandem with diminishing returns, is concerning. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 56% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

One more thing to note, we've identified 3 warning signs with Zhongtong Bus HoldingLTD and understanding these should be part of your investment process.

While Zhongtong Bus HoldingLTD 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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