Zhejiang Wanliyang (SZSE:002434) Has Some Difficulty Using Its Capital Effectively

What financial metrics can indicate to us that a company is maturing or even in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. So after glancing at the trends within Zhejiang Wanliyang (SZSE:002434), we weren't too hopeful.

Understanding 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. Analysts use this formula to calculate it for Zhejiang Wanliyang:

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

0.03 = CN¥196m ÷ (CN¥10b - CN¥3.7b) (Based on the trailing twelve months to September 2023).

So, Zhejiang Wanliyang has an ROCE of 3.0%. Ultimately, that's a low return and it under-performs the Machinery industry average of 6.0%.

See our latest analysis for Zhejiang Wanliyang

In the above chart we have measured Zhejiang Wanliyang's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Zhejiang Wanliyang for free.

So How Is Zhejiang Wanliyang's ROCE Trending?

We are a bit worried about the trend of returns on capital at Zhejiang Wanliyang. Unfortunately the returns on capital have diminished from the 7.1% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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 Zhejiang Wanliyang to turn into a multi-bagger.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 36%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 3.0%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

Our Take On Zhejiang Wanliyang's ROCE

In summary, it's unfortunate that Zhejiang Wanliyang is generating lower returns from the same amount of capital. And long term shareholders have watched their investments stay flat over the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Like most companies, Zhejiang Wanliyang does come with some risks, and we've found 1 warning sign that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.